US insurance group The Hartford, has revealed it entered into a definitive agreement effective with National Indemnity Company (NICO) to cover asbestos exposures.
Under the terms of the deal which became effective on 31 December the Berkshire Hathaway subsidiary will provide a $1.5 billion aggregate excess of loss reinsurance agreement covering certain of The Hartford’s asbestos and environmental liability exposures. The reinsurance premium for this agreement is $650 million.
Hartford revealed the agreement covers potential adverse development on its existing asbestos and environmental reserves as of Dec. 31, 2016, excluding those held by the company’s U.K. Property and Casualty (P&C) run-off subsidiaries, which the company is under contract to sell and currently expects to close in first quarter 2017.
Its statement said: “The agreement provides up to $1.5 billion of reinsurance for adverse net loss reserve development above estimated net loss reserves of $1.7 billion as of December 31, 2016. 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.”
“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,” said Chief Financial Officer Beth Bombara. “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. NICO is a very strong counterparty and this agreement reduces 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 company said the agreement will be accounted for in The Hartford’s fourth quarter 2016 financial statements as a retroactive reinsurance agreement, resulting in a charge of approximately $423 million, after-tax, against fourth quarter 2016 net income, or a pro forma impact of $1.10 per share to Sept. 30, 2016 book value per diluted share of $48.30. The reinsurance premium is expected to have a slightly negative impact on 2017 P&C net investment income and does not affect the company’s expectation to execute its previously announced 2017 capital management plan including equity repurchases of $1.3 billion.