Insurance premiums for prospective insurance and reinsurance policies are earned in proportion to the level of insurance protection provided. In most cases, premiums are recognized as revenues ratably over their terms with unearned premiums computed on a monthly or daily pro rata basis. Consideration received for retroactive reinsurance policies is accounted for as premiums earned at the inception of the contracts. Premiums earned are stated net of amounts ceded to reinsurers.
During 1996, Berkshire consummated mergers with GEICO Corporation ("GEICO") and FlightSafety International, Inc. ("FlightSafety"). Each of these mergers was accounted for by the purchase method. The excess of the purchase cost of each business over the fair value of net assets acquired as of each merger date was recorded as goodwill of acquired businesses and is being amortized over forty years. The aggregate amount of goodwill applicable to these acquisitions was approximately $2.5 billion. Additional information concerning each merger is provided below.
In March 1996, The Walt Disney Company ("Disney") completed its acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). Subsidiaries of Berkshire received aggregate consideration of $2.5 billion, which included cash of $1.2 billion and common shares of Disney with a value of $1.3 billion. Gross realized gains from sales of equity securities include a gain of $2.2 billion relating to Disney's acquisition of Capital Cities.
Income from finance businesses for each of the past three years is summarized below (in millions):
** Includes interest on loans and receivables from affiliated companies of $3.2, $6.9 and $5.0 in 1997, 1996 and 1995, respectively.
On December 2, 1996, Berkshire received net proceeds of $447.1 million from the issuance of $500 million principal amount of 1% Senior Exchangeable Notes, due December 2, 2001 (the "Exchange Notes"). Under certain conditions, on the last trading day of January, April, July and October from January 1997 through July 2001, each $1,000 principal amount Exchange Note is exchangeable at the option of the holder into 29.92 shares of Travelers Group Inc. common stock ("Travelers Stock"). (Prior to November 28, 1997, each Exchange Note was exchangeable into 17.65 shares of Salomon Inc common stock.) Beginning on December 2, 1999, under certain conditions, the Exchange Notes are exchangeable into 29.92 shares of Travelers Stock at the option of the Company. Upon such exchange, Berkshire may elect to redeem the Exchange Notes for the equivalent cash value of the underlying Travelers Stock. In all other circumstances, Berkshire will pay the principal amount at maturity.
The Exchange Notes are carried at accreted value plus an additional amount (the "contingent value") representing the excess, if any, of the value of the underlying Travelers Stock over the accreted value of the Notes. The contingent value of the Exchange Notes is initially charged to unrealized appreciation of investments. The contingent value amount is subsequently recognized in the Consolidated Statements of Earnings as a charge against realized investment gains on the earliest of the (i) dates that the Exchange Notes mature or are exchanged or otherwise redeemed or (ii) the date the related underlying stock is otherwise no longer owned by the Company. As of December 31, 1997, the contingent value component of the aggregate carrying value of the Exchange Notes was $342.6 million. There was no contingent value associated with the Exchange Notes at year end 1996.