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Full Text Of Berkshire Letter Deciding To Override SEC Accounting Policies
Below is the full text of Berkshire's "disagreement" letter with the SEC over the recognition of long-term impairments. The letter was sent out in July 1. Good thing Berkshire only took so much temporal liberty with determining what filing is material. Had it waited a mere decade longer, it is more than likely this whole matter would have been completely irrelevant, as its 2020 release would have coincided with TARP/QE 666, geared exclusively to bailing out Berkshire's 99.9% holdings in Goldman and all the other insolvent TBTFs.
BERKSHIRE HATHAWAY INC.
3555 FARNAM STREET
OMAHA, NEBRASKA 68131
TELEPHONE (402) 346-1400
FAX (402) 346-3375
July 1, 2010
Mr. Gus Rodriguez
Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
| Re: |
Berkshire Hathaway Inc. |
|
Form 10-K for the Year Ended December 31, 2009 |
|
Filed March 1, 2010 |
|
File No. 001-14905 |
Dear Mr. Rodriguez:
The
purpose of this letter is to respond to your letter dated June 11,
2010. This response supplements our response
dated May 7, 2010 to comment two in your letter dated April 7, 2010. To
assist you in reviewing our response, we preceded our response with a
copy (in bold type) of the point as stated in your letter.
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1: Significant accounting policies and practices
(m) Deferred charges reinsurance assumed, page 69
| 1. |
In |
To
assist the Commission in understanding our responses to both the
Commission’s original comment and its follow up comment, a brief
discussion of the nature and characteristics of Berkshire’s retroactive
reinsurance contracts follows. Berkshire’s retroactive reinsurance
contracts provide
indemnification of past losses under short-duration insurance contracts
written or assumed by ceding companies. There is no exposure to loss
from events occurring after the inception date of these contracts and
loss events may have occurred many
years or decades prior to the contract inception date. In certain
instances, the underlying policies of the ceding company that gave rise
to the losses being reinsured expired many years prior to the inception
of the retroactive reinsurance
contracts.
Retroactive
reinsurance premiums are usually received in full at the inception of
the contract.
The limits of loss indemnification provided are often very large.
Berkshire’s retroactive reinsurance contracts primarily cover casualty
exposures, and include reported claims as well as losses that have
occurred but have not yet been reported.
These contracts often cover asbestos, environmental and mass tort
casualty exposures and are expected to have especially long claim
resolution and settlement periods. As a result, premiums charged for
retroactive reinsurance policies are
significantly affected by the time value of money (or economic
discounting of the estimated ultimate losses payable over time). At the
inception of these contracts, Berkshire expects that the ultimate loss
and loss expense payments will exceed the
premiums received (although it is not a certainty that the loss and loss
expense payments will exceed the premiums for any given contract). The
premiums received at the inception of the contracts are invested, which
generates a substantial amount of
investment earnings in future periods. Accordingly, after considering
investment income, Berkshire ultimately expects to earn profits from
these contracts.
In
contrast to retroactive reinsurance, when entering into prospective
reinsurance contracts, Berkshire’s objective
is to generate underwriting profits (premiums earned less losses and
underwriting expenses incurred) exclusive of investment income earned on
the premiums received. Coverage is often offered for catastrophe or
other large loss exposures and with the
general expectation that claims will be reported and settled over
relatively shorter time periods. Other prospective reinsurance coverage
is offered for casualty exposures with anticipated longer duration claim
resolution patterns. In spite of the
expected longer claim resolution periods, the underwriting of these
coverages is governed by the same objective of achieving an underwriting
profit as the discipline of an underwriting profit objective helps
mitigate the greater uncertainties in
estimating losses resulting from the longer anticipated claim resolution
process.
By
means of example, we
reference Berkshire’s retroactive reinsurance contract with Equitas
Limited (“Equitas”) that became effective in 2007. Equitas is a
London-based entity established to reinsure and manage the 1992 and
prior years’ non-life
insurance and reinsurance liabilities of the Names or Underwriters at
Lloyd’s of London. The Equitas contract represented approximately 50% of
Berkshire’s consolidated loss reserves and unamortized deferred charges
under retroactive
reinsurance contracts as of December 31, 2009.
Under
the Equitas contract, Berkshire initially provided reinsurance
coverage subject to an aggregate limit of indemnification of $13.8
billion. The contract requires that Berkshire pay all claims and related
costs subsequent to March 30, 2007 arising from the underlying
insurance and reinsurance contracts of
Equitas, subject to the aforementioned excess limit of indemnification. A
significant amount of loss exposure associated with the Equitas
contract is related to asbestos, environmental and latent injury claims.
Berkshire
received premium consideration of $7.1 billion at the inception of the
contract and recorded a loss reserve
liability of $9.3 billion that represented its estimate of the
undiscounted amount of losses and allocated and unallocated loss
adjustment expenses expected to be paid under the contract. The
difference between the premiums received and the loss
reserve liability was recorded as a deferred charge asset.
We
believe that the principles and provisions of
SFAS 113 related to accounting for short-duration retroactive
reinsurance contracts by ceding enterprises should be followed by
assuming enterprises. SFAS 113 was issued in response to an increase in
the diversity and complexity of reinsurance
contracts, which included retroactive reinsurance of short-duration
contracts, and the lack of accounting guidance in SFAS 60 with respect
to such reinsurance transactions. Reference is made to paragraph 40 of
SFAS 113. SFAS 60 provides fundamental
guidance on the accounting by insurance enterprises of traditional
short-duration and long- duration insurance contracts. However, the
distinction between prospective and retroactive insurance or reinsurance
was not addressed in SFAS 60.
In developing our conclusion, we further considered paragraph 47 of SFAS 113. Paragraph 47 follows:
47. “Likewise, the Board concluded that it was not necessary to address the accounting for reinsurance by the
assuming enterprise. An assuming enterprise generally (emphasis added)
accounts for a reinsurance contract in the same manner as an insurance
contract sold to an individual or non-insurance enterprise, as
prescribed in Statements 60
and 97. Some constituents recommended that the Board specify the
accounting by assuming enterprises and require symmetrical accounting by
both parties to a reinsurance transaction. Those recommendations
were not adopted because addressing the
accounting for assuming enterprises would inevitably require a
reconsideration of the accounting for primary insurance, which was
beyond this project’s scope (emphasis added). However, the conditions for reinsurance accounting in
paragraphs 8–13 and certain disclosure requirements apply to both ceding and assuming enterprises.”
We
agree that assuming enterprises “generally” should apply
the provisions of SFAS 60 consistent with the accounting for primary
insurance. Except for retroactive reinsurance, Berkshire accounts for
all of its assumed reinsurance of short-duration insurance and
reinsurance contracts pursuant to the
principles in SFAS 60. However, paragraph 47 of SFAS 113 suggests that
there may be certain instances in which a reinsurer’s accounting for a
reinsurance transaction may not be in the same manner as that of a
primary insurance contract sold
directly to a non-insurance enterprise.
We
believe that retroactive reinsurance of short-duration contracts
is unique and differs significantly from traditional prospective
insurance and reinsurance contracts. In fact, SFAS 113 establishes
retroactive reinsurance as an exception to the basic SFAS 60 accounting
model for short-duration contracts from the
perspective of the ceding company. In SFAS 113, a settlement-based
accounting model was deemed to be more appropriate given that the
insured loss events under a retroactive reinsurance contract have
already occurred and there is no exposure to
future loss events. Furthermore, while paragraph 47 of SFAS 113 does not
require assuming enterprises to apply the provisions of SFAS 113
symmetrically with respect to retroactive reinsurance contracts, it does
not preclude symmetrical application
by the reinsurer. As stated in paragraph 47, the FASB chose not to
require symmetry by the reinsurer because it simply did not wish to
include primary insurance in the scope of its project.
In order to further assist the Commission in understanding that our accounting for retroactive reinsurance contracts
complies with GAAP, please note the following:
Under
ASC 944 (SFAS 60 par. 9), premiums on short-duration
contracts are ordinarily earned over the contract period in proportion
to the coverage provided, which is a reference to the period over which
loss events may occur. Berkshire earns premiums under retroactive
reinsurance contracts in full as of the
contract inception date as there is no exposure to insured loss events
occurring thereafter.
Under
ASC 944
(SFAS 60 par. 17), liabilities for unpaid claims are accrued when the
insured loss events occur (including provisions for incurred but not
reported claims). Under ASC 944 (SFAS 60 par. 18), the liability for
unpaid claims is based on the estimated
ultimate cost of settling the claims. Since the insured events have
occurred (although not all have been reported) prior to the inception of
the retroactive reinsurance contracts, Berkshire accrues liabilities
for unpaid losses as of the inception
of the contracts. Berkshire accrues these liabilities at the estimated
ultimate amount of the losses payable. Such liabilities are not
discounted. ASC 944 (SFAS 60) does not directly establish standards on
discounting of loss reserves of
short-duration insurance and reinsurance contracts. However, Berkshire’s
insurance subsidiaries are not permitted to discount retroactive
reinsurance loss reserve liabilities for statutory accounting purposes
and the related loss reserves do
not relate to settled claims where the claim payment patterns are fixed
and determinable. As a result, for financial reporting purposes,
Berkshire carries its liabilities for unpaid losses assumed under
retroactive reinsurance contracts at the
estimated ultimate undiscounted amount, consistent with the guidance in
SEC Topic 5-N.
As
previously noted, the difference between the consideration received
and the estimated ultimate (undiscounted) liability accrued is recorded
as a deferred charge at the inception of a contract. This amount
effectively represents the time-value discount attributable to receiving
the premiums in full at inception and
the obligation to pay claims over many years hence. As a result,
Berkshire recognizes no net gain or loss in earnings at the inception of
a contract. Berkshire believes that the deferred charge is akin to an
implied interest cost associated with the
acquisition of the reinsurance contract and that the cost is recoverable
over time through investment income generated from investing the
premiums.
Berkshire
amortizes deferred charge balances using the interest method over the
remaining settlement period consistent
with ASC 944 (SFAS 113 par. 22). In applying the interest method, an
effective interest rate is derived for each retroactive reinsurance
contract based on the expected timing and amount of the ultimate loss
and loss adjustment expense payments such
that the present value of these estimated payments equals the premium
consideration received. Berkshire subsequently monitors and adjusts the
deferred charge balance to reflect differences between the actual and
the estimated timing and amount of
the loss payments, as well as to reflect revisions to the estimated
remaining undiscounted liability for unpaid losses. The revised deferred
charge balance is determined using the retrospective method so that the
adjusted balance reflects the amount
that would have existed had the revised estimates been available at the
inception of the reinsurance transaction, consistent with ASC 944 (SFAS
113 par. 24). The change in the deferred charge balance is reflected in
earnings.
Deferred
charges are evaluated for recoverability (i.e. impairment) on an
individual contract basis by reference to the
effective interest rate derived in applying the interest method. As of
December 31, 2009, Berkshire’s consolidated gross reserves for
retroactive reinsurance contracts were approximately $18.6 billion and
the unamortized deferred charges
were approximately $4.0 billion (or approximately 21.5% of the related
gross reserves). As of December 31, 2009, the weighted average effective
interest rate applicable to Berkshire’s retroactive reinsurance
contracts was approximately
3.3%. We have concluded that the unamortized deferred charges are
recoverable through anticipated future investment income.
We
also note that SFAS 60 paragraph 59C provides guidance that is
analogous to establishing deferred charges on
retroactive reinsurance of short-duration contracts. Paragraph 59C
discusses that an acquirer in a business acquisition may establish an
amortizable intangible asset for the implied discount on short-duration
insurance contract liabilities as of the
acquisition date (which by definition relates to past loss events from
the perspective of the acquirer) if the acquirer’s accounting policies
are to account for such reserves on an undiscounted basis. Although
Berkshire did not acquire a
business in connection with any of its retroactive reinsurance
contracts, it did acquire/assume the payment obligations arising from
short-duration insurance contracts at an implied discount.
In
summary, based on the information provided in this letter and in our
initial response to comment two of the Commission’s letter dated
April 7, 2010, we believe that our accounting for deferred charges
related to assumed retroactive reinsurance contracts complies with ASC
944 (SFAS 60 and SFAS 113) and is
reasonable and supportable based on the guidance available. We further
believe that the unamortized deferred charge balances as of December 31,
2009 were properly determined and fully recoverable after considering
anticipated future investment
income.
The company acknowledges that:
| • |
the company is responsible for the adequacy and accuracy of the disclosure in the filings; |
| • |
staff |
| • |
the |
Should you have any questions or further comments, please contact the
undersigned at 402-978-5423.
|
Very truly yours, |
|
BERKSHIRE HATHAWAY INC. |
|
/s/ Marc D. Hamburg |
|
By Marc D. Hamburg |
|
Senior Vice President – Chief Financial Officer |
| cc: |
Mark Brunhofer – Senior Staff Accountant |
|
Ibolya Ignat – Staff Accountant |
|
Daniel J. Jaksich |
And from the original response letter dated May 7, just after the flash crash:
As
of December 31,
2009, approximately 77% of the $1,864 million of unrealized losses in
equity investments that were in a continuous unrealized loss position
for more than twelve months was concentrated in two issuers, Kraft Foods
($789 million or 18% of cost) and
U.S. Bancorp ($646 million or 27% of cost). These securities were
principally acquired during 2006 and 2007.
As
a result of
the housing and credit crises and near collapse of the financial markets
in 2008, the market prices for substantially all of Berkshire’s
investments in equity securities declined, including Kraft Foods and
U.S. Bancorp. This was consistent with
the stock market in general. While stock prices for these two companies
at December 31, 2009 did not change significantly as compared to
December 31, 2008, each company reported significant earnings despite
the prevailing economic
conditions.
At
December 31, 2009, we reviewed publicly available information on these
companies and concluded that the
underlying businesses of Kraft Foods and U.S. Bancorp were each
financially sound and continued to possess significant future earnings
potential, and that it was likely that their stock prices would
eventually exceed our original cost. We also
concluded that the market price declines in Kraft Foods (18% of cost)
and U. S. Bancorp (27% of cost) were not extraordinary given the
economic and other conditions prevalent in 2008 and 2009.
At
December 31, 2009, we further concluded we had the ability and intent
to hold these securities to their anticipated recovery. We
believe it is reasonably possible that the market prices of Kraft Foods
and U.S. Bancorp will recover to our cost within the next one to two
years assuming that there are no material adverse events affecting these
companies or the industries in
which they operate. As of March 31, 2010, the market prices of Kraft
Foods and U.S. Bancorp increased by 11.3% and 15.0%, respectively, since
December 31, 2009. Historically, Berkshire has demonstrated the ability
to hold equity securities
for very long periods and currently holds certain equity securities that
were acquired over 20 years ago.
Based
on the
information presented above, we believe that our conclusions to not
record other-than-temporary impairment charges on investments in an
unrealized loss position for more than twelve consecutive months was
appropriate and in accordance with ASC 320
and Topic 5M. We will continue to evaluate the unrealized losses in our
investments in equity securities in future periods based on the
information currently available and assess whether impairment losses
should be appropriately considered other
than temporary for financial reporting purposes.
We eagerly await Ms. Becky Quick's reporting on this latest development.
»
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LOL
"coincided with TARP/QE 666"
Duh SEC! suck it up and thank god for us sending this letter to you- Munger Mostly
You'll have to wait as she and WB are sharing a Blizzard right now.
"determining what filing is material"
"material" is defined by our leaders, obama, geithner and ben.
obama and his entourage take down all 571 rooms at 5 star hotel in mumbai courtesy of us taxpayer
http://www.lucianne.com/thread/?artnum=573681
we need austerity for government
When you're a cipher and deep down you realize it, you tend to focus on the trappings of power.
BofA Kaboom ....
Faz ready for takeoff ...
BofA Aug. 2nd $14.44 - Oct.25 $11.16
Laws are only for little people, just ask the IRS, CFTC, SEC, etc. Either have nothing or be Too Big To Jail.
.
Warren is a shit bag.
I think they should delist the bastards.
dirty.
Minions of the "oracle" have spoken, while enjoying a lap dance and some under the table goodies as the letter was being typed out.
I smell a slap on the wrist.
It is the Chewbacca defense.
I think Buffett was a straight shooter in his earlier years. He's corrupted now, no better than a crack dealer in downtown DC, or a member of Congress. "Aw shucks" Warren is a hypocrite of the highest order. I hope that fucker is reduced to dumpster diving when TSHTF. Buffett eats shit.
in summation: PSTFU hoe...and make me a grilled cheese..gawd help you if the crusts aren't cut off.
Ominous verbiage rivaling We are all Keynesians now when FDR and Nixon violated the Constitution to separate gold from the dollar domestically and then internationally
WEB on record saying the Kraft undervalued stock acquisition of Cadbury a dumb deal
http://www.fool.com/investing/general/2010/05/19/buffett-is-selling.aspx
The BNI deal was financed by BRK stock, raising the question of whether BRK was overvalued or undervalued.
http://seekingalpha.com/article/185587-rays-of-hypocrisy-shine-through-b...
Maybe all that Aspartame enriched Diet Coke and MSG snack food got to his synapses
http://nymag.com/daily/intel/2008/09/warren_buffetts_brain_food.html
CM & WEB saw what happened to BRK AAA to AA credit ratings by S&P and Moody's et al when they marked their naked short market index puts to market, dropping earnings -96% in 2008 Q4. Their response was to sell MCO
http://247wallst.com/2010/02/04/the-death-of-aaa-ratings-sp-and-berkshir...
WEB's 2009 annual letter to shareholders insisted naked put shorts were a win win win because Black & Scholes overestimated option premiums on one century options
Ignoring the fact that 80 year-old WEB may not be around a century hence, the put options he sold were not one century expirations and recent Black Swans showed B&S assumptions of normally distributed volatility were not in evidence, therefore long term option premiums may be underpriced
Recent let them eat cake bailout comments by CM and WEB suggest they may not only be out of touch with markets, but the populace at large that used to consume their product
Silver in fact outperformed BRK by a factor of four since BRK reportedly sold the world's largest supply held in London, possibly on a covered short option sale exercised by Barclay for their SLV
Bill Gates may still have some PAAS, which quadrupled
http://seattletimes.nwsource.com/html/businesstechnology/2002893863_silv...
Perhaps two pictures are worth 2000 words
http://www.gnosticliberationfront.com/arnold__buffett.htm
Could BRK become like BAC and LEH the sacrificial lamb?
ATG,
On the strength of your commentary alone, I have bookmarked forever this page on my humble computer.
Thanks for the memories.
Wow. How sad, after all these years of honest appraisal. Burning down a house built over a lifetime.
How many mutual funds will be marked-to-breakeven tonight?
Warren and his business is a creature of fiat. When the USD dies, BRK is over.