REPORT ON EXAMINATION
OF THE
BERKSHIRE HATHAWAY ASSURANCE CORPORATION
AS OF
DECEMBER 31, 2012
DATE OF REPORT MAY 23, 2014
EXAMINER ADEBOLA AWOFESO
TABLE OF CONTENTS
ITEM NO. PAGE NO.
1 Scope of Examination 2
2. Description of Company 4
A. Management 4
B. Territory and plan of operation 5
C. Reinsurance 7
D. Holding company system 8
E. Significant operating ratios 11
F. Risk management and internal controls 12
3. Financial Statements 13
A. Balance sheet 13
B. Statement of income 14
4. Losses and loss adjustment expenses 15
5. Compliance with prior report on examination 15
6. Summary of comments and recommendations 16
NEW
YORK
STATE
DEPARTMENTof
FINANCIAL SERVICES
Andrew M. Cuomo
Benjamin M. Lawsky
Governor
Superintendent
May 23, 2014
Honorable Benjamin M. Lawsky
Superintendent of Financial Services
Albany, New York 12257
Sir:
Pursuant to the requirements of the New York Insurance Law, and in compliance with the
instructions contained in Appointment Number 30965 dated February 26, 2013, attached hereto, I
have made an examination into the condition and affairs of Berkshire Hathaway Assurance
Corporation as of December 31, 2012, and submit the following report thereon.
Wherever the designation “the Company” appears herein without qualification, it should be
understood to indicate Berkshire Hathaway Assurance Corporation.
Wherever the term “Department” appears herein without qualification, it should be
understood to mean the New York State Department of Financial Services.
The examination was conducted at the Company’s main administrative office located at 3024
Harney Street, Omaha, Nebraska 68131.
(212) 480-6400 | One State Street, New York, NY 10004-2319 | WWW.DFS.NY.GOV
2
1. SCOPE OF EXAMINATION
The Department has performed a coordinated group examination of the Berkshire Hathaway
Assurance Corporation. The examination was conducted in conjunction with the state of Nebraska,
which was the coordinating state of the Berkshire Hathaway Group of Insurance Companies. This is
the first financial examination of the Company after the report on organization, which was conducted
as of December 27, 2007. This examination covered the period from December 28, 2007 through
December 31, 2012. Transactions occurring subsequent to this period were reviewed where deemed
appropriate by the examiner.
The examination was performed concurrently with the examinations of the following insurers:
American Centennial Insurance Company (DE)
Berkshire Hathaway Assurance Corporation (NY)
Berkshire Hathaway Homestate Insurance Company (NE)
Berkshire Hathaway Life Insurance Company of Nebraska (NE)
Brookwood Insurance Company (IA)
Columbia Insurance Company (NE)
Continental Divide Insurance Company (CO)
Cypress Insurance Company (CA)
Finial Reinsurance Company (CT)
National Fire & Marine Insurance Company (NE)
National Indemnity Company (NE)
National Indemnity Company of Mid-America (IA)
National Indemnity Company of the South (FL)
National Liability & Fire Insurance Company (CT)
Oak River Insurance Company (NE)
Redwood Fire and Casualty Insurance Company (NE)
Stonewall Insurance Company (NE)
Unione Italiana Reinsurance Company of America (NY)
Wesco-Financial Insurance Company (NE)
Other states participating in this examination were California, Colorado, Connecticut,
Delaware, Florida, Iowa and Nebraska.
This examination was conducted in accordance with the National Association of Insurance
Commissioners (“NAIC”) Financial Condition Examiners Handbook (“Handbook”), which requires
that we plan and perform the examination to evaluate the financial condition and identify prospective
risks of the Company by obtaining information about the Company including corporate governance,
identifying and assessing inherent risks within the Company and evaluating system controls and
procedures used to mitigate those risks. This examination also includes assessing the principles used
3
and significant estimates made by management, as well as evaluating the overall financial statement
presentation, management’s compliance with Statutory Accounting Principles and annual statement
instructions when applicable to domestic state regulations.
All financially significant accounts and activities of the Company were considered in
accordance with the risk-focused examination process. The examiners also relied upon audit work
performed by the Company’s independent public accountants when appropriate.
This examination report includes a summary of significant findings for the following items as
called for in the Handbook:
Significant subsequent events
Company history
Corporate records
Management and control
Fidelity bonds and other insurance
Territory and plan of operation
Growth of Company
Loss experience
Reinsurance
Accounts and records
Statutory deposits
Financial statements
Summary of recommendations
A review was also made to ascertain what action was taken by the Company with regard to
comments and recommendations contained in the prior report on examination.
This report on examination is confined to financial statements and comments on those matters
that involve departures from laws, regulations or rules, or that are deemed to require explanation or
description.
4
2. DESCRIPTION OF COMPANY
Berkshire Hathaway Assurance Corporation was incorporated under the laws of the State of
New York on December 21, 2007. It became licensed on December 28, 2007 in the State of New
York to engage in financial guaranty and surety insurance business.
The Company operates as a monoline bond insurer and provides insurance for tax-exempt
bonds issued by states, cities and other local entities. The Company insures these securities for
issuers both at the time their bonds are sold to the public (primary transactions) and also provides
insurance for bonds that are already owned by investors in the secondary market.
The Company is 51% owned by Columbia Insurance Company (“CIC”) and 49% owned by
National Indemnity Company (“NICO”), both Nebraska domiciled insurers.
Capital paid in is $15,000,000 consisting of 2,500 shares of $6,000 par value per share
common stock. Effective January 18, 2008, the Company amended its charter to increase the par
value of its common stock from $1,000 per share to $6,000 per share. Gross paid in and contributed
surplus is $990,000,000. The following chart shows the changes to capital stock and gross paid in
and contributed surplus during the examination period:
Common Gross paid in and
Date Description Capital Stock contributed surplus
12/28/2007 Beginning balance $ 2,500,000 $102,500,000
1/18/2008 Increase in par value of common stock 12,500,000 (12,500,000)
3/31/2008 Surplus contribution from parent 0 900,000,000
12/31/2012 Ending balance $15,000,000 $990,000,000
A. Management
Pursuant to the Company’s charter and by-laws, management of the Company is vested in a
board of directors consisting of not less than seven members. At December 31, 2012, the board of
directors was comprised of the following eight members:
Name and Residence Principal Business Affiliation
John Duane Arendt, Insurance Executive,
Stamford, CT National Liability & Fire Insurance Company
5
Name and Residence Principal Business Affiliation
Erika Bunner Duffy, Attorney,
Fairfield, CT National Liability & Fire Insurance Company
Lori Jill Friedman, Attorney,
Armonk, NY National Liability & Fire Insurance Company
Dale David Geistkemper Treasurer and Controller,
Omaha, NE National Indemnity Company
Ajit Jain, Chairman of the Board,
Rye, NY National Liability & Fire Insurance Company
Forrest Nathan Krutter, Attorney, Insurance Executive,
Milyon Mills, NH National Indemnity Company
Brian Gerard Snover, Attorney, Insurance Executive,
Stamford, CT National Liability & Fire Insurance Company
Donald Frederick Wurster, Insurance Executive,
Omaha, NE National Indemnity Company
As of December 31, 2012, the principal officers of the Company were as follows:
Name
Donald Frederick Wurster
Dale David Geistkemper
Erika Bunner Duffy
Title
President
Treasurer
Secretary
B. Territory and Plan of Operation
As of December 31, 2012, the Company was licensed to write business in all fifty states, the
District of Columbia and Puerto Rico.
As of the examination date, the Company was authorized to transact the kinds of insurance as
defined in the following numbered paragraphs of Section 1113(a) of the New York Insurance Law:
Paragraph Line of Business
16 (C)(D)(E)(F)(G)(H)(I) Surety
17 (A) Credit
25 Financial Guaranty
6
Based on the lines of business for which the Company is licensed and the Company’s current
capital structure, and pursuant to the requirements of Articles 41 and 69 of the New York Insurance
Law, the Company is required to maintain a minimum surplus to policyholders in the amount of
$66,400,000.
The following schedule shows the direct premiums written by the Company both in total and
in New York for the period under examination:
Premiums Written in New York State as
Calendar Year New York State Total Premiums a Percentage of Total Premium
2008 $500,859,153 $593,629,919 84.37%
2009 $ 18,862,526 $ 38,814,133 48.60%
2010 $ 0 $ 6,511,350 0.00%
2011 $ 0 $ 5,379,513 0.00%
2012 $ 1,853,850 $ 10,214,551 18.15%
The company operates as a monoline bond insurer and provides insurance for tax-exempt
bonds issued by states, cities and other local entities. The Company insures these securities for
issuers both at the time their bonds are sold to the public (primary transactions) and also provides
insurance for bonds that are already owned by investors in the secondary market.
7
C. Reinsurance
The Company has structured its ceded reinsurance program to limit its maximum to any one
risk through quota share and facultative reinsurance treaties.
The following is a description of the Company’s ceded reinsurance program in effect at
December 31, 2012:
The Company entered into a 49% quota share reinsurance agreement with National Indemnity
Company (“NICO”), an affiliate, whereby the Company may issue and choose to cede to NICO 49%
of the Company’s acceptable risks. During the examination period, no risks were ceded under this
agreement.
The Company entered into a facultative quota share reinsurance agreement with National
Indemnity Company (“NICO”), an affiliate. Under the terms of this agreement NICO agrees to
reinsure 92.5% of a surety bond the Company issued to M&T Bank Corporation.
Reinsurance agreements with affiliates were reviewed for compliance with Article 15 of the
New York Insurance Law. It was noted that all affiliated reinsurance agreements were filed with the
Department pursuant to the provisions of Section 1505(d)(2) of the New York Insurance Law.
Ceded reinsurance agreements in effect as of the examination date were reviewed and found
to contain the required clauses, including an insolvency clause meeting the requirements of Section
1308 of the New York Insurance Law.
Examination review of the Schedule F data reported by the Company in its filed annual
statement was found to accurately reflect its reinsurance transactions
.
Additionally, management has represented that all material ceded reinsurance agreements
transfer both underwriting and timing risk as set forth in SSAP No. 62R. Representations were
supported by appropriate risk transfer analyses and an attestation from the Company's Chief
Executive Officer pursuant to the NAIC Annual Statement Instructions. Additionally, examination
review indicated that the Company was not a party to any finite reinsurance agreements. All ceded
reinsurance agreements were accounted for utilizing reinsurance accounting as set forth in SSAP No.
62R.
8
D. Holding Company System
The Company is a member of the Berkshire Hathaway Group. The Company is 51% owned
by Columbia Insurance Company and 49% owned by National Indemnity Company, both Nebraska
domiciled corporations, which are ultimately controlled by Berkshire Hathaway Inc. (34.787%
owned by Warren E. Buffett).
A review of the Holding Company Registration Statements filed with this Department
indicated that such filings were complete and were filed in a timely manner pursuant to Article 15 of
the New York Insurance Law and Department Regulation 52.
The following is an abbreviated chart of the Company’s holding company system at
December 31, 2012:
i
!
,,
.
"
9
Berkshire Hathaway Inc.
(34.787% owned by Warren E. Buffett)
100%
100%
B H Columbia Inc.
National Indemnity Company
100%
49%
Columbia Insurance Company
Berkshire Hathaway Assurance Corporation
51%
10
At December 31, 2012, the Company was party to the following agreements with other
members of its holding company system:
Tax Allocation Agreement
The Company is party to a tax allocation agreement among various affiliated members of its
ultimate parent Berkshire Hathaway Inc. The agreement has an effective date of December 31, 2007.
Pursuant to the terms of the agreement, the parties will file consolidated federal income tax returns.
Said agreement stipulates that the Company’s tax liability on a consolidated basis would not exceed
the liability had the Company filed its tax return on a stand-alone basis. The agreement was filed
with the Department pursuant to Section 1505 of the New York Insurance Law.
Service Agreement with National Indemnity Company
Effective January 1, 2008, the Company and its affiliate, National Indemnity Company
(“NICO”), entered into a service agreement. Under the terms of this agreement, NICO performs
certain administrative and special services on behalf of the Company. The agreement provides that
payment for services provided shall be on an actual cost basis. The agreement was filed with the
Department pursuant to Section 1505 of the New York Insurance Law.
Service Agreement with National Liability & Fire Insurance Company
Effective January 1, 2008, the Company and its affiliate, National Liability & Fire Insurance
Company (“NLF”), entered into a service agreement. Under the terms of this agreement, NLF
performs certain administrative and special services on behalf of the Company. The agreement
provides that payment for services provided shall be on an actual cost basis. The agreement was filed
with the Department pursuant to Section 1505 of the New York Insurance Law.
11
Investment Services Agreement
Effective December 31, 2007, the Company and NICO entered into an Investment Services
Agreement. Pursuant to the agreement, NICO will act as an investment manager of the Company.
The agreement was filed with the Department pursuant to Section 1505 of the New York Insurance
Law.
Inter-Company Service Agreement with FlightSafety International
Effective January 1, 2008, the Company and its affiliate, FlightSafety International
(“FlightSafety”), entered into a service agreement. Under the terms of this agreement, FlightSafety
performs certain administrative and special services on behalf of the Company. The agreement
provides that payment for services provided shall be on an actual cost basis. The agreement was filed
with the Department pursuant to Section 1505 of the New York Insurance Law.
E. Significant Operating Ratios
The following ratios have been computed as of December 31, 2012, based upon the results of
this examination:
Net premiums written to surplus as regards policyholders 1%
Liabilities to liquid assets (cash and invested assets less investments in affiliates) 38%
Premiums in course of collection to surplus as regards policyholders 0%
All of the above ratios fall within the benchmark range set forth in the Insurance Regulatory
Information System (“IRIS”) of the National Association of Insurance Commissioners.
The underwriting ratios presented below are on an earned/incurred basis and encompass the
December 28, 2007 to December 31, 2012 time period covered by this examination:
Amounts Ratios
Losses and loss adjustment expenses incurred $ 0 0.00%
Other underwriting expenses incurred 48,089,161 41.81
Net underwriting gain 66,920,679 58.19
Premiums earned $115,009,840 100.00%
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F. Risk Management and Internal Control
A review was made of the Company’s internal control with regard to its IT environment. The
review found numerous internal control weaknesses. The Company was provided with a copy of the
IT recommendations, none of which will be considered a serious control deficiency.
It is recommended that the Company address the internal control weaknesses identified during
the review of the Company’s IT environment.
13
3. FINANCIAL STATEMENTS
A. Balance Sheet
The following shows the assets, liabilities and surplus as regards policyholders as of
December 31, 2012 as determined by this examination and as reported by the Company:
Assets
Bonds
Preferred stocks
Common stocks
Property held for sale
Cash, cash equivalents and short-term investm
Investment income due and accrued
Uncollected premiums and agents' balances in
course of collection
Assets
$ 544,335,858
128,000,000
423,032,584
3,750,000
ents 733,699,804
12,067,273
the
101,198
Assets Not
Admitted
$ 0
3,750,000
0
Net Admitted
$
Assets
544,335,858
128,000,000
423,032,584
0
733,699,804
12,067,273
101,198
Total assets $1,844,986,717 $3,750,000 $1,841,236,717
Liabilities, Surplus and Other Funds
Liabilities
Losses and loss adjustment expenses $ 0
Taxes, licenses and fees (excluding federal and foreign income
taxes) 258,892
Current federal and foreign income taxes 4,343,760
Net deferred tax liability 9,859,827
Unearned premiums 534,329,314
Advance premium 2,760,194
Payable to parent, subsidiaries and affiliates 48,831
Contingency reserves
140,339,151
Total liabilities $ 691,939,969
Surplus and Other Funds
Common capital stock $ 15,000,000
Gross paid in and contributed surplus 990,000,000
Unassigned funds (surplus) 144,296,748
Surplus as regards policyholders $1,149,296,748
Total liabilities, surplus and other funds $1,841,236,717
Note: The Internal Revenue Service has completed its audits of the Company’s consolidated Federal
Income Tax returns through tax year 2009. All material adjustments, if any, made subsequent to the
date of examination and arising from said audits, are reflected in the financial statements included in
this report. Audits covering tax years 2010 through 2011 are currently under examination. The
examiner is unaware of any potential exposure of the Company to any tax assessment and no liability
has been established herein relative to such contingency.
14
B. Statement of Income
Surplus as regards policyholders increased $1,044,296,748 during the examination period
December 28, 2007 through December 31, 2012, detailed as follows:
Underwriting Income
Premiums earned $ 115,009,840
Deductions:
Losses and loss adjustment expenses incurred $ 0
Other underwriting expenses incurred 48,089,161
Total underwriting deductions 48,089,161
Net underwriting gain $ 66,920,679
Investment Income
Net investment income earned $ 250,562,739
Net realized capital gain 18,864,173
Net investment gain $ 269,426,912
Other Income
Aggregate write-ins for miscellaneous income $ (193,567)
Total other income $ (193,567)
Net income before federal and foreign income taxes $ 336,154,024
Federal and foreign income taxes incurred 122,262,323
Net income $ 213,891,701
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Surplus as regards policyholders per report on
organization as of December 27, 2007
Net income
Net unrealized capital gains or (losses)
Change in net deferred income tax
Change in non-admitted assets
Cumulative effect of changes in accounting
Capital transferred from surplus
Surplus paid in
Surplus transferred to capital stock
Increase in contingency reserve
Total gains and losses
Net increase (decrease) in surplus
Surplus as regards policyholders per report on
examination as of December 31, 2012
Gains in
Surplus
$213,891,701
54,830,115
19,664,081
1,203,584
12,500,000
900,000,000
$1,202,089,483
Losses in
Surplus
$
4,953,584
12,500,000
140,339,151
$157,792,735
$105,000,000
$1,044,296,748
$1,149,296,748
4. LOSSES AND CONTINGENCY RESERVES
The examination liabilities for losses and contingency reserves are $0 and $140,339,151,
respectively, as of December 31, 2012. These are the same as the amounts reported by the Company
in its 2012 filed annual statement.
In addition to case reserves, the Company is required to establish and maintain contingency
reserves for the protection of insureds and claimants against the effect of excessive losses occurring
during adverse economic cycles. The amount required for those reserves depends on the types of
bonds being insured and are established pursuant to the provisions of Section 6903(a) of the New
York Insurance Law. New York Insurance Law requires that one-eightieth of required contingency
reserves are accreted every quarter over a twenty year period, however the Company has committed
to the Department it would accrete one fortieth of required contingency reserves each quarter over a
ten year period.
16
5. COMPLIANCE WITH REPORT ON ORGANIZATION
The report on organization did not contain any comments or recommendations.
6. SUMMARY OF COMMENTS AND RECOMMENDATIONS
ITEM PAGE NO.
A. Risk Management and Internal Control
It is recommended that the Company address the internal control 12
weaknesses identified during the review of the Company’s IT
environment.
Respectfully submitted,
/s/
Adebola Awofeso
Senior Insurance Examiner
STATE OF NEW YORK )
)ss:
COUNTY OF NEW YORK )
ADEBOLA AWOFESO being duly sworn, deposes and says that the foregoing report,
subscribed by him, is true to the best of his knowledge and belief.
/s/
Adebola Awofeso
Subscribed and sworn to before me
this day of , 2014.
APPOINTMENT
NO.
30965
NEW
YORK STATE
DEPARTMENT
OF
FINANCIAL SERVICES
I,
BENJAMIN
M.
LAWSKY. Superintendent
of
Financial Services
of
the State
of
New
York,
pursuant
to
the provisions
of
the Financial Services Law
and
the
Insurance Law, do hereby appoint:
Adebola Awofeso
as a proper person
to
examine the affairs
of
the
BERKSHIRE
HATHAWAY
ASSURANCE
CORPORATION
and to make a report
to
me
in
writing
of
the condition
of
said
COMPANY
with such other information
as
he shall deem requisite.
In Witness Whereof, I have hereunto subscribed by name
and
affixed the official Seal
of
the Department
at the City
of
New York
·this 26th day
of
February, 2013
BENJAMIN M LAWSKY
Superintendent
of
Financial Services
By:
Jean Marie Cho
Deputy Superintendent
