The Hartford Makes Major Asbestos Reinsurance Deal with Berkshire Hathaway

(BRK.A), (BRK.B)

Berkshire Hathaway’s National Indemnity Company will provide up to $1.5 billion in reinsurance coverage for insurer The Hartford to cover for asbestos liability losses.

Under the terms of the transaction, The Hartford will pay NICO a reinsurance premium of $650 million in exchange for an aggregate adverse development cover for A&E losses beyond Dec. 31, 2016, aggregate net carried reserves, up to a limit of $1.5 billion.

The reinsurance will cover adverse development on substantially all of the company’s A&E reserves, excluding those held by the company’s U.K. property and casualty run-off subsidiaries (under contract to be sold with a closing projected for the first quarter 2017), as well as other non-U.S. operations with less than $3 million in A&E reserves. NICO will provide a collateral trust account as security for NICO’s claim payment obligations to the Hartford Insurance Pool. Berkshire will guarantee certain payment and performance obligations of NICO. The Hartford will retain responsibility for claims handling and other administrative services, subject to certain conditions.

The Hartford expects to recognize an after-tax GAAP loss of $423 million in the fourth quarter of 2016 as a result of this transaction.

Over the longer term, ratings agency A.M. Best believes the reinsurance transaction is credit positive for The Hartford and its subsidiaries as it significantly reduces the uncertainty of the group’s legacy A&E liabilities and will enhance the group’s risk-adjusted capitalization. Near term, however, The Hartford’s ratings will not be affected as risk-adjusted capitalization was comfortably supportive of its ratings and the variability in performance due to the adverse development of the A&E liabilities was not viewed as a substantial negative credit factor.

Chief Financial Officer Beth Bombara of The Hartford notes the company is trying to reduce “uncertainty for investors and others about the ultimate cost of these policy liabilities.”

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.