Liberty Mutual Cedes $3.3B In Liabilities To Berkshire

Liberty Mutual Cedes $3.3B In Liabilities To Berkshire
By Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0], via Wikimedia Commons

Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) agreed to backstop for $6.5 billion of Liberty Mutual Holding Co’s obligations tied to asbestos, environmental and workers compensation policies.

The diversified global insurer said in a statement that it forked over $3 billion for the $6.5 billion of coverage in total from Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) subsidiary National Indemnity Company (NICO).

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Ceded $3.3 billion liabilities

In a statement, Liberty Mutual said it has ceded approximately $3.3 billion of existing liabilities under a retroactive reinsurance agreement. Moreover, NICO will provide approximately $3.2 billion of additional aggregate adverse development cover.

The statement further added that the agreement envisages Liberty’s potentially volatile U.S. asbestos and environmental liabilities arising under policies of insurance and reinsurance. While NICO will assume responsibility for claims handling pertained to Liberty Mutual Insurance’s asbestos and environmental claims, Liberty Mutual will continue to handle all workers compensation claims.

Liberty Mutual’s Chairman and Chief Executive Officer David H. Long expressed the hope that the agreement would strengthen the insurance company’s financial position as it eliminates a substantial source of uncertainty in these liabilities and facilities the company to focus on executing its core businesses.

Berkshire’s expertise

Over the last decade, Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) has been assuming billions of dollars in asbestos risk from insurers including CNA Financial Corp. and American International Group Inc (NYSE:AIG). Such contracts are a bet that Buffet’s company can generate profit by investing policy reserves and managing claims that will stretch out for years.

Warren Buffet fueled Berkshire’s growth over the last five decades by deploying insurance premiums in stocks and takeovers. The company’s dozens of operating businesses now span the transportation, energy, manufacturing and retail industries.

Boston-based Liberty Mutual is one of a number of large insurers that has been trimming its profile in the profit-challenged workers’ compensation line in recent years, though it still remains the top individual workers’ compensation writer in the country. It is the third largest property/casualty insurer in the U.S. based on 2013 direct written premium.

The latest deal aligns with the CEO’s thought process. While unveiling results last October, CEO Long indicated that Liberty Mutual has been pursuing its strategy of growing where it can do so profitably and contracting elsewhere, with a heavy emphasis on improving underwriting performance.

Following the latest announcement, Standard & Poor’s raised its outlook on all of Liberty’s companies to stable from positive. It enhanced Liberty Mutual’s credit rating one grade to BBB, two levels above junk. The rating agency said the latest deal largely mitigates the insurer’s risk of having to add to reserves and reduces earnings volatility.

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