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Management’s Discussion (Continued)
Results of Operations (Continued)
losses of $1.2 billion related to increases in liabilities under our equity index put option contracts and OTTI losses of $590
million related to certain equity and fixed maturity securities, partially offset by after-tax investment gains of $1.2 billion from
the redemptions of our Goldman Sachs and General Electric Preferred Stock investments. We believe that investment and
derivatives gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic
performance. These gains and losses have caused and will likely continue to cause significant volatility in our periodic earnings.
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. Underwriting results represent insurance premiums earned less
insurance losses, benefits and underwriting expenses incurred.
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 considered catastrophe losses
significant if the pre-tax losses incurred from a single event (or series of related events such as tornadoes) exceeded $75 million
on a consolidated basis. In 2013, we incurred pre-tax losses of $436 million related to two events in Europe. In 2012, we
incurred pre-tax losses of approximately $1.1 billion attributable to Hurricane Sandy, which included approximately $490
million incurred by GEICO. In 2011, we incurred pre-tax losses of approximately $2.6 billion, arising from nine events. The
largest losses were from the earthquakes in Japan ($1.25 billion) and New Zealand ($650 million) in the first quarter.
Additionally, we incurred losses from several weather related events in the Pacific Rim and the U.S.
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. In 2011, we reduced estimated liabilities
related to certain retroactive reinsurance contracts which resulted in an increase in pre-tax underwriting earnings of
approximately $875 million. These reductions were primarily due to lower than expected loss experience of one ceding
company. 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 $65 billion). Accordingly, the unpaid loss estimates recorded as of
December 31, 2013 may develop upward or downward in future periods, producing a corresponding decrease or increase,
respectively, 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 certain non-U.S. Dollar denominated reinsurance liabilities of our U.S. based subsidiaries as a
result of foreign currency exchange rate fluctuations. 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. Statutory surplus
of our insurance businesses was approximately $129 billion at December 31, 2013. 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.
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