The net underwriting gain of $11 million in 2004 consisted of current accident year gains of $166 million partially offset by $155 million in prior accident years’ losses. The 2004 current accident year results benefited from a one-time reduction of $70 million in underwriting expenses from the curtailment of certain pension benefits. In 2004, prior accident years’ losses included reserve increases on casualty and workers’ compensation claims of $729 million and $110 million in discount accretion and deferred charge amortization offset by $307 million of reserve reductions for prior years’ property losses (primarily in World Trade Center loss exposures) and $377 million of gains from contract commutations and settlements.
Premiums earned from other multi-line reinsurance increased in 2006 as compared to 2005 due to the continued growth in workers’ compensation programs. Increased premiums were earned in 2005 as compared to 2004 from new workers’ compensation and ongoing aviation programs and were partially offset by declines in quota-share contracts. Underwriting results from other multi-line reinsurance in 2006 reflected favorable comparative underwriting results from property contracts which benefited from low catastrophe losses. These favorable comparative results were somewhat offset by a deterioration in underwriting results from aviation business. Underwriting results in 2005 included estimated losses of approximately $100 million from Hurricanes Katrina, Rita and Wilma, while results in 2004 included losses of approximately $175 million arising from the third quarter hurricanes affecting the U.S. and Caribbean. However, underwriting gains from aviation coverages and approximately $160 million in gains from the commutations of several reinsurance contracts during 2004 more than offset the losses arising from catastrophes.
In 2004, Berkshire adopted the provisions of EITF 00-21 (“Accounting for Revenue Arrangements with Multiple Deliverables”). As a result, for consolidated reporting purposes, the method of recognizing revenue related to NetJets’ fractional aircraft sales was changed. Management continues to evaluate the results of NetJets under the prior revenue recognition criteria and thus has shown revenues and pre-tax earnings for the other services businesses using the prior revenue recognition method. Revenues shown in this table are greater than the amounts reported in Berkshire’s consolidated financial statements by $781 million in 2006, $704 million in 2005 and $902 million in 2004. Pre-tax earnings included in this table for 2006, 2005 and 2004 exceed the amounts included in the consolidated financial statements by $79 million, $63 million and $74 million, respectively.
Berkshire’s consolidated financial position reflects very significant amounts of invested assets. A substantial portion of these assets are carried at fair values based upon current market quotations and, when not available, based upon fair value pricing models. Certain of Berkshire’s fixed maturity securities are not actively traded in the financial markets. Further, Berkshire’s finance businesses maintain significant balances of finance receivables, which are carried at amortized cost. Considerable judgment is required in determining the assumptions used in certain valuation models, including interest rate, loan prepayment speed, credit risk and liquidity risk assumptions. Significant changes in these assumptions can have a significant effect on carrying values.
During 2004 and 2005, Berkshire possessed the ability to exercise significant influence on the operations of MidAmerican through its investments in common and convertible preferred stock of MidAmerican, which together possessed 9.7% of the voting rights and 83.4% (80.5% diluted) of the economic rights of MidAmerican. The convertible preferred stock, although generally non-voting, was substantially an identical subordinate interest to a share of common stock and economically equivalent to common stock. Therefore, during that period, Berkshire accounted for its investments in MidAmerican pursuant to the equity method. An unaudited pro forma balance sheet as of December 31, 2005 is included on the face of the accompanying Consolidated Balance Sheets reflecting the consolidation of MidAmerican. Walter Scott, Jr., a member of Berkshire’s Board of Directors, controlled approximately 86% of the voting interest in MidAmerican at December 31, 2005. As a result of Berkshire’s conversion of its preferred stock to voting common stock, at December 31, 2006, Mr. Scott’s voting interest has been reduced to 11%.
The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverables were approximately $5.1 billion at December 31, 2006 and $5.4 billion at December 31, 2005. These liabilities include $3.8 billion at December 31, 2006 and $4.0 billion at December 31, 2005, of liabilities assumed under retroactive reinsurance contracts. Liabilities
Consists of $126 million related to Insurance and Other and ($448) million related to Utilities and Energy businesses.