Berkshire Hathaway 2011 Annual Report Download - page 69

Management’s Discussion (Continued)
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
business in 2010 included estimated losses of $322 million arising from several significant property catastrophe and casualty
loss occurrences in 2010. Underwriting results in 2009 reflected no significant losses from catastrophes during the year.
Changes in estimated losses attributable to prior years’ events were insignificant in 2011. In 2010 and 2009, underwriting results
also included gains from the reductions of estimated unpaid losses for prior years’ loss events due to lower than expected
reported claims.
Retroactive reinsurance policies generally provide very large, but limited, indemnification of unpaid losses and loss
adjustment expenses with respect to past loss events that are generally expected to be paid over long periods of time. Premiums
earned under retroactive reinsurance contracts in 2011 included approximately $1.7 billion from a reinsurance contract with
Eaglestone Reinsurance Company, a subsidiary of American International Group, Inc. (“AIG”). Under the contract, we agreed
to reinsure the bulk of AIG’s U.S. asbestos liabilities. The agreement provides for a maximum limit of indemnification of $3.5
billion. Premiums earned in 2010 included approximately $2.25 billion from a contract with Continental Casualty Company, a
subsidiary of CNA Financial Corporation, and several of its other insurance subsidiaries (collectively the “CNA Companies”).
Under the terms of the reinsurance agreement, BHRG assumed certain asbestos and environmental pollution liabilities of the
CNA Companies subject to an aggregate limit of indemnification of $4 billion. Premiums earned in 2009 included 2.0 billion
Swiss Francs (“CHF”), or approximately $1.7 billion, from an adverse loss development contract with Swiss Re. The Swiss Re
retroactive contract covers substantially all of Swiss Re’s non-life insurance losses and allocated loss adjustment expenses for
loss events occurring prior to January 1, 2009, and is subject to a maximum limit of indemnification of CHF 5 billion.
Underwriting results attributable to retroactive reinsurance include the recurring periodic amortization of deferred charges
that are established with respect to these contracts. At the inception of a contract, deferred charges represent the difference
between the premium received and the estimated ultimate losses payable. Deferred charges are subsequently amortized over the
estimated claims payment period using the interest method and are based on estimates of the timing and amount of loss
payments. The original estimates of the timing and amount of loss payments are analyzed against actual experience and if
necessary are revised based on an actuarial evaluation of the expected remaining losses. Amortization charges and deferred
charge adjustments resulting from changes to the estimated timing and amount of future loss payments are included as a
component of losses and loss adjustment expenses. At December 31, 2011 and 2010, unamortized deferred charges for all of
BHRG’s retroactive contracts were approximately $4.0 billion and $3.7 billion, respectively.
In 2011, the net underwriting gain from retroactive reinsurance contracts was $645 million, which reflected the favorable
impact of a reduction in the estimated liability originally established under the Swiss Re contract of approximately $865 million,
which was attributable to lower than expected loss experience. Gross unpaid losses from retroactive reinsurance contracts were
approximately $18.8 billion at December 31, 2011 compared to approximately $18.7 billion and $18.0 billion as of
December 31, 2010 and 2009, respectively.
Premiums earned from other multi-line property and casualty business included $2.9 billion in 2011, $2.4 billion in 2010 and
$2.8 billion in 2009 from the Swiss Re 20% quota-share contract. Underwriting results of our other multi-line property/casualty
business can be significantly impacted by the timing and magnitude of catastrophe losses and fluctuations in foreign currency
exchange rates. In 2011, other multi-line property and casualty business included estimated catastrophe losses of approximately
$933 million, which were primarily from the earthquakes in Japan and New Zealand and from floods in Thailand. Underwriting
results in 2010 included estimated catastrophe losses of approximately $308 million from the Chilean and New Zealand
earthquakes, the Gulf of Mexico BP Deepwater Horizon oil rig explosion and the Australian floods. The catastrophe losses in both
years arose primarily under the Swiss Re quota-share contract. There were no significant catastrophe losses in 2009.
Underwriting results in 2011 also included foreign currency transaction gains of $140 million arising from the conversion of
certain reinsurance loss reserves and other liabilities that are payable in foreign currencies into U.S. Dollars. In 2010 and 2009,
underwriting results included foreign currency transaction losses of approximately $168 million and $280 million, respectively.
Substantially all of BHRG’s life and annuity premiums generated in 2011 and 2010 were from a life reinsurance contract
entered into in January 2010 with Swiss Re Life & Health America Inc. (“SRLHA”) and a life reinsurance business acquired as
of December 31, 2010 from Sun Life Assurance Company of Canada (“SLACC”). We anticipate that the SRLHA contract and
the business acquired from SLACC will generate substantial premiums earned and life benefits incurred in the future.
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