Berkshire Hathaway 2014 Annual Report Download - page 89

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Management’s Discussion (Continued)
Insurance—Underwriting
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance
activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In
reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected
themselves to in their own insuring activities. Our insurance and reinsurance businesses are: (1) GEICO, (2) General Re,
(3) Berkshire Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway Primary Group.
Our management views insurance businesses as possessing two distinct operations – underwriting and investing.
Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the
responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate performance of underwriting
operations without any allocation of investment income or investment gains.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results,
particularly with respect to BHRG and General Re. For the purpose of this discussion, we consider catastrophe losses significant
if the pre-tax losses incurred from a single event (or series of related events such as tornadoes) exceed $100 million on a
consolidated basis. In 2014, we did not incur any significant catastrophe losses. In 2013, we incurred pre-tax losses of $436
million related to two catastrophe events in Europe. In 2012, we incurred pre-tax losses of approximately $1.1 billion
attributable to Hurricane Sandy. Our periodic underwriting results may be affected significantly by changes in estimates for
unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. Actual claim
settlements and revised loss estimates will develop over time, which will likely differ from the liability estimates recorded as of
year-end (approximately $71.5 billion). Accordingly, the unpaid loss estimates recorded as of December 31, 2014 may develop
upward or downward in future periods, producing a corresponding decrease or increase to pre-tax earnings.
Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from
the changes in the valuation of non-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries as a
result of foreign currency exchange rate fluctuations. Foreign currency exchange rate changes produced pre-tax gains in 2014
and losses in 2013 and 2012. Historically, currency exchange rates have been volatile and the resulting impact on our
underwriting earnings has been relatively significant. These gains and losses are included in underwriting expenses.
A key marketing strategy of our insurance businesses is the maintenance of extraordinary capital strength. A measure of
capital strength is combined shareholders’ equity determined pursuant to statutory accounting rules (“Statutory Surplus”).
Statutory Surplus of our insurance businesses was approximately $129 billion at December 31, 2014. This superior capital
strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and
reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers. Underwriting results
from our insurance businesses are summarized below. Amounts are in millions.
2014 2013 2012
Underwriting gain attributable to:
GEICO ...................................................................... $1,159 $1,127 $ 680
General Re ................................................................... 277 283 355
Berkshire Hathaway Reinsurance Group ............................................ 606 1,294 304
Berkshire Hathaway Primary Group ............................................... 626 385 286
Pre-tax underwriting gain ............................................................ 2,668 3,089 1,625
Income taxes and noncontrolling interests ............................................... 976 1,094 579
Net underwriting gain ....................................................... $1,692 $1,995 $1,046
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