Note 16. Unpaid losses and loss adjustment expenses

The liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under our short duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates for incurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities for the three months ending March 31, 2017 and 2016 follows (in millions).


	2017		2016
Unpaid losses and loss adjustment expenses—beginning of year:
Gross liabilities		$ 76,918		$ 73,144
Reinsurance recoverable and deferred charges		(11,385)		(10,994	)

Net balance		65,533		62,150

Incurred losses and loss adjustment expenses recorded during the period:
Current accident year events		8,165		7,192
Prior accident years’ events		118		(372	)
Retroactive reinsurance and discount accretion		10,283		712

Total incurred losses and loss adjustment expenses		18,566		7,532

Paid losses and loss adjustment expenses during the period with respect to:
Current accident year events		(2,678)		(2,421	)
Prior accident years’ events		(4,222)		(3,828	)
Retroactive reinsurance		(429)		(158	)

Total payments		(7,329)		(6,407	)

Foreign currency translation adjustment		77		(21	)
Unpaid losses and loss adjustment expenses—March 31:
Net balance		76,847		63,254
Reinsurance recoverable and deferred charges		17,051		11,308

Gross liabilities		$ 93,898		$ 74,562

Incurred losses and loss adjustment expenses in the preceding table reflect the losses and loss adjustment expenses recorded in earnings in each period related to insured events occurring in the current year and in prior years. We present incurred and paid losses under retroactive reinsurance contracts and discount accretion separately. Such amounts relate to prior years’ underlying loss events.

Incurred losses and loss adjustment expenses in the first quarter of 2017 reflected increases of $118 million for prior accident years’ events compared to decreases of $372 million in the first quarter of 2016. In 2017, incurred losses for prior years’ events included increases related to our reinsurance businesses, partly offset by reductions attributable to our primary insurance operations. Incurred losses for prior years’ events in 2017 of our reinsurance operations included increases in the estimated liabilities for certain personal injury claims in the United Kingdom due to a regulatory decision that increases calculated lump sum settlement amounts. In addition, we increased liability estimates for claims under certain reinsurance contracts due to reported hurricane and earthquake losses from events in 2016, as well as for estimates of IBNR losses. Incurred losses and loss adjustment expenses in 2016 for prior accident years’ events derived primarily from our direct insurance businesses, and to a lesser extent, from our reinsurance businesses.

In January 2017, Berkshire’s subsidiary, National Indemnity Company (“NICO”), entered into a retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”). Under the agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion, excess of $25 billion retained by AIG, of losses and allocated loss adjustment expenses with respect to certain commercial insurance loss events occurring in years prior to 2016, for cash consideration of $10.2 billion. The transaction became effective on February 2, 2017. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement.

We account for the AIG agreement as retroactive reinsurance of short-duration insurance contracts. As of the effective date, we recorded premiums earned and losses and loss adjustment expenses incurred of $10.2 billion from this contract. We also recorded unpaid losses and loss adjustment expenses of $16.4 billion, representing the estimated ultimate liabilities assumed and a deferred charge reinsurance assumed asset of $6.2 billion, representing the excess of those liabilities over the premiums earned. The deferred charge asset will be amortized over the estimated claims settlement period using the interest method based on the estimated timing and amount of future loss payments. Amortization charges are included in losses and loss adjustment expenses in the Consolidated Statements of Earnings.