One of Berkshire Hathaway’s insurance subsidiary’s, National Indemnity, recently entered a $1.5 billion reinsurance agreement with The Hartford Financial Services Group, more often referred to as The Hartford. Reinsurance, when multiple insurance companies share risk by spreading it between multiple insurers, allows high-risk clients to be covered though it wouldn’t be possible from a single insurance company.
Berkshire Hathaway, or National Indemnity, said that it will cover up to $1.5 billion in insurance losses for The Hartford (a property and casualty insurer) so long as they pay a $650 million premium. This is good news for The Hartford, as the increased asbestos liabilities have decreased the company’s earnings over the last several years.
“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… National Indemnity is a very strong counter party and this agreement reduces uncertainty about potential adverse development while allowing us to continue to handle claims and reinsurance recoveries,” Beth Bombara, CFO at The Harford, said in her statement.
While it does come at a bit of a cost to The Hartford, it should, at the very least, put investors at ease. The premium will be accounted for in 2016 statements, adding $423 million in expenses after taxes, but it will not effect any of The Hartford’s capital plans for 2017.