Berkshire Hathaway 2008 Annual Report Download - page 47

Notes to Consolidated Financial Statements (Continued)
(13) Unpaid losses and loss adjustment expenses
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated
with property and casualty claim occurrences as of the balance sheet dates including estimates for incurred but not reported
(“IBNR”) claims. Considerable judgment is required to evaluate claims and establish estimated claim liabilities.
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance subsidiaries is
as follows (in millions).
2008 2007 2006
Unpaid losses and loss adjustment expenses:
Gross liabilities at beginning of year ............................................ $56,002 $ 47,612 $ 48,034
Ceded losses and deferred charges at beginning of year ............................. (7,126) (4,833) (5,200)
Net balance at beginning of year ............................................... 48,876 42,779 42,834
Incurred losses recorded during the year:
Current accident year ........................................................ 17,399 22,488 13,680
Prior accident years ......................................................... (1,140) (1,478) (612)
Total incurred losses ........................................................ 16,259 21,010 13,068
Payments during the year with respect to:
Current accident year ........................................................ (6,905) (6,594) (5,510)
Prior accident years ......................................................... (8,486) (8,865) (9,345)
Total payments ............................................................. (15,391) (15,459) (14,855)
Unpaid losses and loss adjustment expenses:
Net balance at end of year .................................................... 49,744 48,330 41,047
Ceded losses and deferred charges at end of year .................................. 7,133 7,126 4,833
Foreign currency translation adjustment ......................................... (616) 534 608
Acquisitions ............................................................... 359 12 1,124
Gross liabilities at end of year ................................................... $56,620 $ 56,002 $ 47,612
Incurred losses “prior accident years” reflects the amount of estimation error charged or credited to earnings in each
calendar year with respect to the liabilities established as of the beginning of that year. The beginning of the year net losses and
loss adjustment expenses liability was reduced by $1,690 million in 2008, $1,793 million in 2007 and $1,071 million in 2006. In
each year, the reductions in loss estimates for occurrences in prior years were primarily due to lower than expected severities
and frequencies on reported and settled claims in primary private passenger and commercial auto lines and lower than expected
reported reinsurance losses in both property and casualty lines. Accident year loss estimates are regularly adjusted to consider
emerging loss development patterns of prior years’ losses, whether favorable or unfavorable.
Prior accident years incurred losses also include amortization of deferred charges related to retroactive reinsurance
contracts incepting prior to the beginning of the year. Amortization charges included in prior accident years’ losses were $451
million in 2008, $213 million in 2007 and $358 million in 2006. Certain workers’ compensation loss reserves are discounted.
Net discounted liabilities at December 31, 2008 and 2007 were $2,403 million and $2,436 million, respectively, reflecting net
discounts of $2,616 million and $2,732 million, respectively. Periodic accretions of these discounts are also a component of
incurred prior accident years’ losses. The accretion of discounted liabilities related to prior years’ losses was approximately $99
million in 2008, $102 million in 2007 and $101 million in 2006.
Berkshire’s insurance subsidiaries are exposed to environmental, asbestos and other latent injury claims arising from
insurance and reinsurance contracts. Loss reserve estimates for environmental and asbestos exposures include case basis
reserves and also reflect reserves for legal and other loss adjustment expenses and IBNR reserves. IBNR reserves are
determined based upon Berkshire’s historic general liability exposure base and policy language, previous environmental loss
experience and the assessment of current trends of environmental law, environmental cleanup costs, asbestos liability law and
judgmental settlements of asbestos liabilities.
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