Liberty Mutual Insurance is ceding $3.3 billion in asbestos, environmental and workers compensation liabilities to Berkshire Hathaway subsidiary National Indemnity Company in one of the larger reinsurance deals in recent memory.
In addition to the retroactive reinsurance (effective as of Jan. 1. 2014) for existing liabilities, NICO will also provide $3.2 billion of additional aggregate adverse development cover.
Liberty Mutual said in a statement that it forked over about $3 billion for the $6.5 billion of coverage in total.
The reinsurance agreement with NICO comes down to a goal of eliminating uncertainty so Liberty can be freed up to focus on other things, Chairman and CEO David Long said in a statement.
Across the industry, workers compensation has become a challenge in recent years with underwriting results only recently coming close to breakeven, according to the National Council on Compensation Insurance. In January, Liberty sold one of it workers comp units, Lakeland, Fla.-based Summit Holdings Southeast to American Financial Group.
Liberty Mutual Insurance operates globally, but it is the third largest property/casualty insurer in the U.S. based in 2013 direct written premium. NICO could not be reached for comment.
Liberty’s reinsurance agreement with NICO establishes a combined aggregate adverse development cover for most of Liberty Mutual Insurance’s U.S. workers compensation, asbestos and environmental liabilities with a $12.5 billion attachment point and a $6.5 billion aggregate limit. Liberty’s U.S. asbestos and environmental liabilities from insurance and reinsurance policies issues before Jan. 1, 2005 are included in the agreement, plus commercial insurance worker’s compensation liabilities relating to accidents or injuries from before Jan. 1, 2014, Liberty Mutual said.
As part of the arrangement, NICO takes on the claims-handling responsibility for Liberty Mutual Insurance’s asbestos and environmental claims, but Liberty Mutual Insurance will still handle workers compensation claims.
Standard & Poor’s approved of Liberty Mutual’s actions, raising its outlook on all of Liberty’s companies to stable from positive. S&P’s credit and debt ratings on parent company Liberty Mutual Group are now “BBB,” up from “BBB-.” Financial strength ratings for the insurance operating companies are now set at “A,” up from “A-.”
“As a result of this transaction, our view of Liberty’s financial risk profile has improved to strong from upper adequate, and we now regard its management and governance as satisfactory rather than fair,” S&P Aanalyst Tracy Dolin and others said in the agency’s ratings update for the company.
NICO, meanwhile, has fielded similar reinsurance deals in the past, with Lloyd’s Equitas liabilities (2006), AIG’s global property/casualty insurer Chartis (2010) and much of its legacy asbestos liabilities, and CNA Financial Corp (2010).