Warren Buffett’s National Indemnity Company (NICO), a Berkshire Hathaway Inc subsidiary, has entered into a $1.5 billion aggregate excess of loss reinsurance agreement with The Hartford.
With a reinsurance premium set at $650 million, the agreement will provide $1.5 billion of reinsurance covering adverse net loss reserve development on a portion of The Hartford’s asbestos and environmental liability exposures.
The Hartford Chief Financial Officer (CFO), Beth Bombara, said; “Our asbestos and environmental exposures have generated adverse loss reserve development over time, creating uncertainty for investors and others about the ultimate cost of these policy liabilities, most of which were underwritten prior to 1985.”
The agreement supplies an additional $1.5 billion of protection above NICO’s estimated net loss reserves of $1.7 billion as of Dec. 31, 2016.
The deal adds additional cover for any potential adverse development of The Hartford’s existing asbestos and environmental reserves with the exclusion of NICO’s U.K. Property and Casualty (P&C) run-off subsidiaries, which the company is under contract to sell.
Bombara, added; “The agreement announced today is consistent with our stated objective of evaluating options that had favourable economics, while taking into consideration our expertise in handling these complex claims.”
The Hartford will continue to handle claims, subject to certain conditions, and will retain the risk of recoveries under third-party reinsurance contracts for these exposures.
Bombara said the transaction would reduce uncertainty about potential adverse development, while; “allowing us to continue to handle both claims and reinsurance recoveries, which we believe will enable us to achieve the best possible resolution for these long-tail exposures.”
The $650 million reinsurance premium will result in a fourth quarter 2016 charge to net income of $423 million, after-tax.
The reinsurance premium is expected to have a minor negative impact on 2017 P&C net investment income but will not affect the company’s expectation to enact its 2017 capital management plan, including equity repurchases of $1.3 billion.
Law firm Mayer Brown represented The Hartford in this reinsurance transaction, with Partner’s David Alberts and Ricky Spitzer, as well as Associate Arne Itagaki, all from New York, working on the deal.
