GEICO provides primarily private passenger automobile coverages to insureds in 48 states and the District of Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for coverage directly to the company over the telephone, through the mail or via the Internet. This is a significant element in GEICO's strategy to be a low cost insurer and, yet, provide high value to policyholders.
Premiums earned by GEICO in 2001 totaled $6,060 million, an 8.0% increase over 2000. Premiums earned in 2000 exceeded premiums earned in 1999 by 17.9%. The growth in premiums earned during 2001 reflects increased rates, partially offset by a slight reduction in policies-in-force. In response to the underwriting losses of 2000, GEICO implemented rate increases in many states and tightened underwriting resulting in the much improved underwriting results in 2001.
GEICO's insurance subsidiaries are defendants in a number of class action lawsuits related to the use of replacement repair parts not produced by the original auto manufacturer, the calculation of "total loss" value and whether to pay diminished value as part of the settlement of certain claims. Management intends to vigorously defend GEICO's position on these claim settlement procedures. However, these lawsuits are in various stages of development and the ultimate outcome cannot be reasonably determined.
General Re conducts a global reinsurance business, which provides reinsurance coverage in the United States and 135 other countries around the world. General Re's principal reinsurance operations are: (1) North American property/casualty, (2) international property/casualty, and (3) global life/health. The international property/casualty operations are conducted primarily through Germany-based Cologne Re and its subsidiaries. At December 31, 2001, General Re had an 88% economic ownership interest in Cologne Re.
General Re's North American property/casualty underwriting results for the past three years are summarized below.
General Re's North American property/casualty operations underwrite predominantly excess reinsurance across multiple lines of business. Premiums earned in 2001 exceeded premiums earned in 2000 by $579 million or 17.1%. Earned premiums in 2000 increased over 1999 levels by $552 million or 19.5%. Much of the increase in premiums derived from rate increases and new business (net of the non-renewal of unprofitable business) in the facultative individual risk and casualty treaty markets. Earned premiums in 2001 include $400 million from one retroactive reinsurance contract and a large quota share agreement. An aggregate excess reinsurance contract generated earned premiums of $404 million in 2000 and $154 million in 1999. The North American property/casualty operations generated underwriting losses of $2,843 million in 2001, $656 million in 2000 and $584 million in 1999. The underwriting results in 2001 reflect an exceptionally large loss from the September 11th terrorist attack and charges from revisions to inadequate loss reserve estimates established for pre-2001 claims primarily driven by higher than expected levels of reported claims.
Underwriting results for 2000 also included a net underwriting loss of $239 million from a large excess reinsurance contract in-force during 1999 and 2000. The effect of this agreement on the 1999 net underwriting results was not significant due to a retrocession to the Berkshire Hathaway Reinsurance Group. Although, this contract produced a sizable underwriting loss, it is expected to provide more than commensurate investment benefits in future years due to the large amount of float generated.
General Re's international property/casualty underwriting results for the past three years are summarized below.
General Re's global life/health underwriting results for the past three years are summarized below.
In 2001, earned premiums in the U.S. life/health business increased $194 million (20%) to $1,147 million. In 2000, U.S. life/health premiums exceeded amounts earned in 1999 by $28 million (3.0%). The increase in 2001 was primarily related to increases in the U.S. life business and the acquisition of two Medicare supplement (health) blocks of business. In 2001, premiums from international life/health business increased $21 million (3%) to $841 million. In 2000, international life/health premiums exceeded 1999 by $20 million (3.0%). Adjusting for the effect of foreign exchange, international life/health earned premiums increased 10.4% in 2001 and 14.8% in 2000. The increases in 2001 occurred primarily in the Western Europe and Asia life markets.
Underwriting losses in the U.S. life/health operations were $87 million in 2001, compared with losses of $23 million in 2000 and $117 million in 1999. The U.S. life/health underwriting results for 2001 include $15 million of net losses related to the September 11th terrorist attack. Results for the U.S. life/health reinsurance operations include $46 million of reserve increases related primarily to special risk business, which was discontinued in 1999. Partially offsetting the aforementioned losses were the effects of improved mortality in the U.S. individual life business, favorable claim development and rate increases in the U.S. individual health business.
International life/health operations generated an underwriting gain of $5 million in 2001 compared to losses of $61 million in 2000 and $10 million in 1999. In 2001, improved results were achieved in both the life and health businesses, which each reported a small underwriting profit in 2001. The losses in 2000 primarily related to personal accident and pension lines of business.
BHRG's underwriting losses in 2001 were $647 million, compared to losses of $162 million in 2000 and $251 million in 1999. Underwriting losses from retroactive reinsurance contracts totaled $371 million in 2001, $191 million in 2000 and $ 97 million in 1999. Retroactive reinsurance contracts indemnify ceding companies for losses arising under insurance or reinsurance contracts written in the past, usually many years ago. Consequently, these contracts are often expected to provide indemnification of environmental and other latent injury claims. While contract terms vary, losses under the contracts are subject to a very large aggregate dollar limit, occasionally exceeding $1 billion under a single contract.
The catastrophe and other non-retroactive reinsurance businesses generated an underwriting loss of $276 million in 2001, an underwriting gain of $29 million in 2000 and an underwriting loss of $154 million in 1999. The underwriting loss for 2001 includes a net loss of approximately $530 million from the terrorist attack on September 11th. Partially offsetting this loss were profits from the remainder of the catastrophe reinsurance business and loss reserve reductions on contracts written in prior years. In 2000 and 1999, the catastrophe reinsurance business generated underwriting gains of $183 million and $196 million, respectively, reflecting relatively minor amounts of catastrophe losses. The timing and magnitude of catastrophe losses can produce considerable volatility in periodic underwriting results.
Berkshire's other primary insurance businesses consist of a wide variety of smaller insurance businesses that principally write liability coverages for commercial accounts. These businesses include: National Indemnity Company's primary group operation ("NICO Primary Group"), a writer of motor vehicle and general liability coverages; United States Investment Corporation ("USIC"), acquired by Berkshire in August 2000 and whose subsidiaries underwrite specialty insurance coverages; a group of companies referred to internally as "Homestate" operations, providers of standard multi-line insurance, and Central States Indemnity Company, a provider of credit and disability insurance to individuals nationwide through financial institutions.
Additional information regarding each significant business acquisition is contained in Notes 2 and 3 of the Consolidated Financial Statements. In general, many of Berkshire's non-insurance businesses have been adversely affected by the general economic slowdown in the United States during 2001 and exacerbated by the effects of the terrorist attack on September 11, 2001. Nevertheless, Berkshire's management considers that most of its non-insurance businesses have performed well under these difficult conditions. The following is a discussion of significant matters impacting comparative results for the non-insurance businesses.
On a comparative full year basis, building products revenues were $3,746 million roughly unchanged from the prior year. Full year operating profits of approximately $570 million declined about 4%. Most of the decline occurred at Johns Manville where comparative results were negatively impacted by higher raw material prices and energy costs.
This segment includes FlightSafety and Executive Jet. FlightSafety provides high technology training to operators of aircraft and ships. FlightSafety's worldwide clients include corporations, the military and government agencies. Executive Jet is the world's leading provider of fractional ownership programs for general aviation aircraft. Revenues from flight services in 2001 increased $284 million (12.4%) over 2000. About 83% of the increase in revenues was attributed to Executive Jet, which produced significant increases in revenues from both flight operations and aircraft sales. Revenues from FlightSafety also increased approximately 7.7% in 2001 as compared to 2000, reflecting both increased training revenues and product sales. Operating profits in 2001 decreased $27.1 million (12.8%) as compared to 2000. Increased operating profits at FlightSafety were more than offset by reduced operating profits at Executive Jet. Executive Jet's results in 2001 and 2000 reflect operating losses related to expansion into Europe as well as significantly higher operating costs incurred to insure that a premier level of safety, security and service is maintained. The increases in safety and security costs were exacerbated by the September 11th terrorist attack.
The Scott Fetzer companies are a group of about twenty diverse manufacturing and distribution businesses under common management. Principal businesses in this group of companies sell products under the Kirby (home cleaning systems), Campbell Hausfeld (air compressors, paint sprayers, generators and pressure washers) and World Book (encyclopedias and other educational products) names.
On a comparative full-year basis, Shaw's revenues in 2001 of $4,012 million declined by about $100 million from 2000. The decline in revenues reflects primarily a decline in square yards sold. Sales in 2001 were negatively affected by the economic recession in the U.S., particularly in the commercial markets, and by slowing demand after the September 11th terrorist attack.
In 2001, Shaw's pre-tax operating profit totaled $292 million. Shaw's operating results in 2001 benefited from lower raw material costs and lower interest costs, partially offset by higher energy costs. Although uncertainty in the U.S. economy persists, management is cautiously optimistic that sales and results will be stable in 2002.
Revenues from the non-insurance businesses increased $1,959 million (32.5%) in 2000 as compared to 1999. Operating profits of $1,400 million during 2000 increased $570 million (68.7%) from the comparable 1999 amount. Business acquisitions completed during 1999 and 2000 account for a significant portion of the revenue increase. The acquisitions of Jordan's Furniture (November 1999), CORT Business Services (February 2000), Ben Bridge Jeweler (July 2000) and Justin Brands and Acme Brick (August 2000) account for about 50% of the increase. The flight services segment and the finance and financial products segment account for most of the remaining comparative increase. Most of the increase in the flight services segment was attributed to Executive Jet which produced significant increases in revenues from both flight operations and aircraft sales. Operating profits for the finance and financial products segment increased $413 million primarily as a result of realized gains on a large portfolio of fixed maturity securities acquired during 1999 pursuant to a proprietary trading strategy. These securities were sold during 2000. The aforementioned business acquisitions in the aggregate accounted for substantially all of the remaining increase in operating profits.
Goodwill amortization and other purchase-accounting adjustments reflect the after-tax effect on net earnings with respect to the amortization of goodwill of acquired businesses and the amortization of fair value adjustments to certain assets and liabilities which were recorded at the business acquisition dates. Amortization of goodwill was $572 million in 2001, $715 million in 2000 and $477 million in 1999. Goodwill amortization in 2000 included a charge of $219 million to write-off the remaining goodwill related to Dexter Shoe (see Note 1(g) to the Consolidated Financial Statements).
Other purchase-accounting adjustments consist primarily of the amortization of the excess market value over the historical cost of fixed maturity investments that existed as of the date of certain business acquisitions. Such excess is included in Berkshire's cost of the investments and is being amortized over the estimated remaining lives of the assets. The unamortized excess remaining in the cost of fixed maturity investments was $565 million at December 31, 2001, $680 million at December 31, 2000 and $940 million at December 31, 1999.
This section discusses interest rate risks associated with Berkshire's financial assets and liabilities. Berkshire's management prefers to invest in equity securities or to acquire entire businesses based upon the principles discussed in the following section on equity price risk. When unable to do so, management may alternatively invest in bonds or other interest rate sensitive instruments. Berkshire's strategy is to acquire securities that are attractively priced in relation to the perceived credit risk. Management recognizes and accepts that losses may occur. Berkshire has historically utilized a modest level of corporate borrowings and debt. Further, Berkshire strives to maintain the highest credit ratings so that the cost of debt is minimized. Berkshire utilizes derivative products to manage interest rate risks to a very limited degree.
The following table summarizes the estimated effects of hypothetical increases and decreases in interest rates on assets and liabilities that are subject to interest rate risk. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to prepayment options available. For these reasons, actual results might differ from those reflected in the table which follows. Dollars are in millions.
Strategically, Berkshire strives to invest in businesses that possess excellent economics, with able and honest management and at sensible prices. Berkshire's management prefers to invest a meaningful amount in each investee. Accordingly, Berkshire's equity investments are concentrated in relatively few investees. At year-end 2001 and 2000, over 70% of the total fair value of investments in equity securities was concentrated in four investees.
Berkshire's preferred strategy is to hold equity investments for very long periods of time. Thus, Berkshire management is not necessarily troubled by short term price volatility with respect to its investments provided that the underlying business, economic and management characteristics of the investees remain favorable. Berkshire strives to maintain above average levels of shareholder capital to provide a margin of safety against short term equity price volatility.
GRS evaluates and records a fair-value adjustment to recognize counterparty credit exposure and future costs associated with administering each contract. The expected credit exposure for each trade is initially established on the trade date and is determined through the use of a proprietary credit exposure model that is based on historical default probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures are continually monitored and adjusted due to changes in the credit quality of the counterparty, changes in interest and currency rates or changes in other factors affecting credit exposure.
Berkshire's balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated shareholders' equity at December 31, 2001 totaled $58.0 billion. Consolidated cash and invested assets, excluding assets of finance and financial products businesses totaled approximately $72.5 billion at December 31, 2001 compared to $77.1 billion at December 31, 2000, including approximately $5.3 billion in cash and cash equivalents at the end of each year. During 2001 Berkshire deployed about $4.7 billion in cash for business acquisitions. Cash utilized in these acquisitions was generated internally. Also contributing to the decline in invested assets was a $7.0 billion reduction in unrealized gains in Berkshire's investments in equity securities. Partially offsetting these declines was cash flows generated from operations of approximately $6.6 billion, primarily from insurance operations.
Berkshire's consolidated borrowings under investment agreements and other debt, excluding finance businesses, totaled $3,485 million at December 31, 2001 compared to $2,663 million at December 31, 2000. The increase in borrowings during 2001 relates primarily to pre-acquisition debt of Shaw and Johns Manville, as well as an increase in borrowings by Executive Jet to finance aircraft inventory and core fleet acquisitions. During the second quarter of 2001, Berkshire filed a shelf registration to issue up to $700 million in new debt securities at a future date. The intended purpose of the future issuance of debt is to fund the repayment of currently outstanding borrowings of certain Berkshire subsidiaries. The timing and amount of the debt to be issued under the shelf registration has not yet been determined.
Notes payable and other borrowings of Berkshire's finance and financial products businesses totaled $9.0 billion at December 31, 2001 and $2.1 billion at December 31, 2000. The balance at December 31, 2001 includes Berkadia's outstanding term loan of $4.9 billion (see Note 9 to the Consolidated Financial Statements) and $613 million of debt of XTRA Corporation, which Berkshire acquired on September 20, 2001. The remaining increase was due to increased commercial paper borrowings by GRS to fund short-term liquidity needs.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Berkshire Hathaway Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
* Average shares outstanding include average Class A Common shares and average Class B Common shares determined on an equivalent Class A Common Stock basis. Net earnings per common share shown above represents net earnings per equivalent Class A Common share. Net earnings per Class B Common share is equal to one-thirtieth (1/30) of such amount or $17 per share for 2001, $73 per share for 2000, and $34 per share for 1999.
BERKSHIRE HATHAWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001
Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are property and casualty insurance businesses conducted on both a direct and reinsurance basis. Further information regarding these businesses and Berkshire's other reportable business segments is contained in Note 19. Berkshire initiated and/or consummated several business acquisitions over the past three years. The significant business acquisitions are described more fully in Note 2. The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with accounts of all its subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts in 2000 and 1999 have been reclassified to conform with current year presentation.
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment expenses for property and casualty insurance are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period of many years. Actual results may differ from the estimates and assumptions used in preparing the Consolidated Financial Statements.
Berkshire's management determines the appropriate classifications of investments at the time of acquisition and re-evaluates the classifications at each balance sheet date. Investments may be classified as held-for-trading, held-to-maturity, or, when neither of those classifications is appropriate, as available-for-sale. Berkshire's investments in fixed maturity and equity securities are primarily classified as available-for-sale, except for certain investments, which are classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, reflecting Berkshire's intent and ability to hold the securities to maturity. Available-for-sale securities are stated at fair value with net unrealized gains or losses reported as a separate component in shareholders' equity. Realized gains and losses, which arise when available-for-sale investments are sold (as determined on a specific identification basis) or other-than-temporarily impaired are included in the Consolidated Statements of Earnings.
Accounting policies and practices for investments held by finance and financial products businesses are described in Note 9.
As a result of new accounting standards issued in June 2001, accounting for goodwill has changed. Goodwill arising from business acquisitions after July 1, 2001 is subject to an impairment only model, instead of an amortization and impairment model. See Note 1(n) below for further discussion of these new standards.
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement costs of property/casualty insurance and reinsurance contracts. The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, except that amounts arising from certain reinsurance businesses are discounted as discussed below. Estimated ultimate payment amounts are based upon (1) individual case estimates, (2) estimates of incurred-but-not-reported losses, based upon past experience and (3) reports of losses from ceding insurers.
(n) Accounting pronouncements to be adopted subsequent to December 31, 2001
Although Berkshire has not completed its assessment of these new accounting standards, it expects that the provisions of SFAS No. 142 related to accounting for goodwill will have a significant impact on its consolidated earnings in 2002 when compared to consolidated earnings for years prior to 2002. The accompanying Consolidated Statement of Earnings for 2001 includes goodwill amortization of $572 million. Additionally Berkshire's equity income from its investment in MidAmerican Energy Holdings Company includes its share of MidAmerican's $96 million of goodwill amortization.
On January 8, 2001, Berkshire acquired approximately 87.3% of the common stock of Shaw for $19 per share or $2.1 billion in total. An investment group consisting of Robert E. Shaw, Chairman and CEO of Shaw, Julian D. Saul, President of Shaw, certain family members and related family interests of Messrs. Shaw and Saul, and certain other directors and members of management acquired the remaining 12.7% of Shaw. In January 2002, Berkshire acquired all of the shares of Shaw held by the investment group in exchange for 4,505 shares of Berkshire Class A common stock and 7,063 shares of Class B common stock.
On July 31, 2001, Berkshire acquired a 90% equity interest in MiTek from Rexam PLC for approximately $400 million. Existing MiTek management acquired the remaining 10% interest. MiTek, headquartered in Chesterfield, Missouri, produces steel connector products, design engineering software and ancillary services for the building components market.
On September 20, 2001, Berkshire acquired XTRA through a cash tender offer and subsequent statutory merger for all of the outstanding shares. Holders of XTRA common stock received aggregate consideration of approximately $578 million. XTRA, headquartered in Westport, Connecticut, is a leading operating lessor of transportation equipment, including over-the-road trailers, marine containers and intermodal equipment.
In addition, Berkshire completed six significant acquisitions in 2000. Information concerning five of these acquisitions follows. Information concerning the other acquisition is contained in Note 3 (Investments in MidAmerican Energy Holdings Company).
Effective July 3, 2000, Berkshire acquired Ben Bridge. Ben Bridge is the leading operator of upscale jewelry stores based in major shopping malls in the Western U.S.
Effective December 18, 2000, Berkshire acquired Benjamin Moore. Benjamin Moore is a formulator, manufacturer and retailer of a broad range of architectural and industrial coatings, available principally in the U.S. and Canada.
Each of the business acquisitions described above was accounted for under the purchase method. The excess of the purchase cost of the business over the fair value of net assets acquired was recorded as goodwill of acquired businesses.
During the second half of 2001 Berkshire initiated two additional business acquisitions which had not closed as of December 31, 2001. Information concerning these transactions follows.
The FOL entities are currently operating as debtors-in-possession pursuant to its Chapter 11 bankruptcy filing currently pending before the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On January 2, 2002, the Bankruptcy Court issued an order determining Berkshire as the successful bidder for the FOL entities' basic apparel business. A hearing to determine whether the FOL reorganization plan is confirmed (such plan contemplates the aforementioned sale of the basic apparel business to Berkshire) has been scheduled for April 4, 2002. If the FOL reorganization plan is confirmed at that time, the closing will occur in the second quarter of 2002.
MidAmerican is a global leader in the production of energy from diversified fuel sources including geothermal, natural gas, hydroelectric, nuclear and coal. MidAmerican also is a leader in the supply and distribution of energy in the U.S. and U.K. consumer markets.
The Consolidated Statements of Earnings reflect, as Income from MidAmerican Energy Holdings Company, Berkshire's proportionate share of MidAmerican's net income with respect to the investments accounted for pursuant to the equity method, as well as interest earned on the 11% trust preferred security. Income derived from equity method investments totaled $115 million in 2001 and $66 million for the period beginning on March 14, 2000 and ending December 31, 2000.
Condensed consolidated statements of earnings of MidAmerican for the year ending December 31, 2001 and for the period from March 14, 2000 through December 31, 2000 are as follows. Amounts are in millions.
Data with respect to investments in securities with fixed maturities are shown below (in millions).
(1) Amounts above exclude securities with fixed maturities held by finance and financial products businesses. See Note 9.
(2) Net of unrealized losses of $143 million and $77 million as of December 31, 2001 and 2000, respectively.
Realized gains (losses) from sales and redemptions of investments are summarized below (in millions). Realized losses include impairment charges of $247 million in 2001.
Receivable balances as of December 31, 2001 and 2000 are as follows (in millions).
Accounts payable, accruals and other liabilities as of December 31, 2001 and 2000 are as follows (in millions).
Berkshire's finance and financial products businesses consist of numerous businesses engaged in a variety of activities. The principal business activities include proprietary investing (BH Finance), real estate financing (Berkshire Hathaway Credit Corporation), transportation equipment leasing (XTRA Corporation, acquired in September 2001), risk management products (General Re Securities or "GRS"), annuities (Berkshire Hathaway Life Insurance Company of Nebraska) and Berkadia LLC (see Note (c) below).
In January 2002, General Re announced that it would commence a long-term run-off of GRS. The run-off is expected to occur over a period of years, during which, GRS will limit its new business to certain risk management transactions and will unwind its existing asset and liability positions in an orderly manner.
Income of Berkshire's finance and financial products businesses is shown below (in millions).
Annuity reserves and policyholder liabilities are carried at the present value of the actuarially determined ultimate payment amounts discounted at market interest rates existing at the inception of the contracts. Such interest rates range from 5% to 8%. Periodic accretions of the discounted liabilities are included in annuity expenses.
The derivative financial instruments involve, to varying degrees, elements of market, credit, and liquidity risks. Market risk is the possibility that future changes in market conditions may make the derivative financial instrument less valuable. The level of market risk is influenced by factors such as volatility, correlation and liquidity. GRS controls market risk exposures by taking offsetting positions in either cash instruments or other derivatives. GRS manages its exposures on a portfolio basis and monitors its market risk on a daily basis across all products by calculating the effect on operating results of potential changes in market variables over a one week period. GRS has established $22 million as its value at risk (VAR) limit with a 99th percentile confidence interval for potential losses over a weekly horizon.
Liquidity risk can arise from funding of GRS's portfolio of open transactions. Movements in underlying market variables affect both future cash flows related to the transactions and collateral required to cover the value of open positions. Strategies have been developed to ensure GRS has sufficient resources to cover its potential liquidity needs through its access to General Re Corporation's (the parent company of GRS) internal sources of liquidity, commercial paper program, lines of credit and medium-term program.
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet dates. Considerable judgment is required to evaluate claims and establish estimated claim liabilities, particularly with respect to certain lines of business, such as reinsurance assumed, or certain types of claims, such as environmental or latent injury liabilities. Additional information regarding incurred losses will be revealed over time and the estimates will be revised resulting in gains or losses in the periods made.
The accompanying Consolidated Statement of Earnings for 2001 includes estimated pre-tax underwriting losses of approximately $2.4 billion resulting from the terrorist attack in the U.S. on September 11, 2001. This amount is included in the table as incurred loss -- current accident year. Berkshire's management believes it will literally take years to resolve complicated coverage issues, which could produce a material change in the ultimate loss amount.
Prior accident years' losses incurred also include amortization of deferred charges related to retroactive reinsurance contracts incepting prior to the current year. Amortization charges included in prior accident years' losses were $328 million in 2001, $145 million in 2000 and $59 million in 1999. The increases in such charges in 2001 and 2000 are the result of several new contracts written over the past three years. The unamortized balance of deferred charges was $3,232 million at December 31, 2001 compared to $2,593 million at December 31, 2000. Net discounted liabilities at December 31, 2001 and 2000 were $1,834 million and $1,531 million, respectively. Periodic accretions of these liabilities are also a component of prior year losses incurred. See Note 1 for additional information.
The liabilities for environmental and latent injury claims and claims expenses net of reinsurance recoverables were approximately $6.3 billion at December 31, 2001. Approximately, $5.0 billion of these reserves were assumed under retroactive reinsurance contracts written by the Berkshire Hathaway Reinsurance Group. Claims arising from these contracts are subject to aggregate policy limits. Thus, Berkshire's exposure to environmental and latent injury claims under these contracts are, likewise, limited.
No materially restrictive covenants are included in any of the various debt agreements. Payments of principal amounts expected during the next five years are as follows (in millions).
The liability for income taxes as of December 31, 2001 and 2000 as reflected in the accompanying Consolidated Balance Sheets is as follows (in millions).
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are shown below (in millions).
Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The major differences between statutory basis accounting and GAAP are that deferred charges-reinsurance assumed, deferred policy acquisition costs, unrealized gains and losses on investments in securities with fixed maturities and related deferred income taxes are recognized under GAAP but not for statutory reporting purposes. In addition, statutory accounting for goodwill of acquired businesses requires amortization over 10 years, compared to 40 years under GAAP.
Premiums written and earned by Berkshire's property/casualty and life/health insurance businesses during each of the three years ending December 31, 2001 are summarized below. Dollars are in millions.
Certain Berkshire insurance and non-insurance subsidiaries individually sponsor defined benefit pension plans covering their employees. Benefits under the plans are generally based on years of service and compensation, although benefits under certain plans are based on years of service and fixed benefit rates. Funding policies are generally to contribute amounts required to meet regulatory requirements plus additional amounts determined by management based on actuarial valuations. Most U.S. plans are funded through assets held in trust. However, pension obligations under plans for non-U.S. employees are unfunded. Plan assets are primarily invested in fixed income obligations of U.S. Government Corporations and agencies and cash equivalents and equity securities.
The components of net periodic pension expense for all plans are as follows (in millions).
Information related to Berkshire's reportable business operating segments is shown below.
Other businesses not specifically identified above consist of: Buffalo News, a daily newspaper publisher in Western New York; International Dairy Queen, which licenses and services a system of about 6,000 Dairy Queen stores; See's Candies, a manufacturer and distributor of boxed chocolates and other confectionery products; H.H. Brown Shoe, Lowell Shoe, Dexter Shoe and Justin Brands, manufacturers and distributors of footwear and CORT Business Services, a leading national provider of rental furniture and related services.
A disaggregation of Berkshire's consolidated data for each of the three most recent years is presented in the tables which follow on this and the following page. Amounts are in millions.
* Amounts of interest expense represent interest on borrowings under investment agreements and other debt exclusive of that of finance businesses and interest allocated to certain businesses.
(1) The amount of realized gain for any given period has no predictive value and variations in amount from period to period have no practical analytical value particularly in view of the unrealized appreciation now existing in Berkshire's consolidated investment portfolio.