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Management’s Discussion (Continued)<br />
Derivative contract liabilities (Continued)<br />
municipality contracts are generally based on bond pricing data on the underlying bond issues and credit spread estimates. We<br />
monitor and review pricing data and spread estimates for consistency as well as reasonableness with respect to current market<br />
conditions. We make no significant adjustments to the pricing data or inputs obtained.<br />
Prices in a current market trade involving identical (or sufficiently similar) risks and contract terms as our equity index put<br />
option or credit default contracts could differ significantly from the fair values used in the financial statements. We do not<br />
operate as a derivatives dealer and currently do not utilize offsetting strategies to hedge our equity index put option or credit<br />
default contracts. We currently intend to allow these contracts to run off to their respective expiration dates.<br />
Other Critical Accounting Policies<br />
We record deferred charges with respect to liabilities assumed under retroactive reinsurance contracts. At the inception of<br />
these contracts, the deferred charges represent the excess, if any, of the estimated ultimate liability for unpaid losses over the<br />
consideration received. Deferred charges are amortized using the interest method over an estimate of the ultimate claim<br />
payment period with the periodic amortization reflected in earnings as a component of losses and loss adjustment expenses.<br />
Deferred charge balances are adjusted periodically to reflect new projections of the amount and timing of remaining loss<br />
payments. Adjustments to deferred charge balances resulting from changes to these assumptions are determined retrospectively<br />
from the inception of the contract. Unamortized deferred charges were approximately $4.35 billion at December 31, 2013.<br />
Significant changes in the estimated amount and the timing of payments of unpaid losses may have a significant effect on<br />
unamortized deferred charges and the amount of periodic amortization.<br />
Our Consolidated Balance Sheet includes goodwill of acquired businesses of $57.0 billion, which includes approximately<br />
$2.7 billion associated with our various acquisitions in 2013. We evaluate goodwill for impairment at least annually and we<br />
conducted our most recent annual review during the fourth quarter of 2013. Our review includes determining the estimated fair<br />
values of our reporting units. There are several methods of estimating a reporting unit’s fair value, including market quotations,<br />
underlying asset and liability fair value determinations and other valuation techniques, such as discounted projected future net<br />
earnings or net cash flows and multiples of earnings. We primarily use discounted projected future earnings or cash flow<br />
methods. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, operating cash<br />
flows and capital expenditures, as well as an appropriate discount rate and other inputs. A significant amount of judgment is<br />
required in estimating the fair value of a reporting unit and in performing goodwill impairment tests. Due to the inherent<br />
uncertainty in forecasting cash flows and earnings, actual results may vary significantly from the forecasts. If the carrying<br />
amount of a reporting unit, including goodwill, exceeds the estimated fair value, then, as required by GAAP, we estimate the<br />
fair values of the individual assets (including identifiable intangible assets) and liabilities of the reporting unit. The excess of the<br />
estimated fair value of the reporting unit over the estimated fair value of its net assets establishes the implied value of goodwill.<br />
The excess of the recorded amount of goodwill over the implied value is charged to earnings as an impairment loss.<br />
Market Risk Disclosures<br />
Our Consolidated Balance Sheets include a substantial amount of assets and liabilities whose fair values are subject to<br />
market risks. Our significant market risks are primarily associated with interest rates, equity prices, foreign currency exchange<br />
rates and commodity prices. The fair values of our investment portfolios and equity index put option contracts remain subject to<br />
considerable volatility. The following sections address the significant market risks associated with our business activities.<br />
Interest Rate Risk<br />
We regularly invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire such securities<br />
that are attractively priced in relation to the perceived credit risk. Management recognizes and accepts that losses may occur<br />
with respect to assets. We also issue debt in the ordinary course of business to fund business operations, business acquisitions<br />
and for other general purposes. We strive to maintain high credit ratings so that the cost of our debt is minimized. We rarely<br />
utilize derivative products, such as interest rate swaps, to manage interest rate risks.<br />
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