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Berkshire unit's retroactive reinsurance biz expands with Ironshore cover

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Berkshire unit's retroactive reinsurance biz expands with Ironshore cover

The massive adverse development cover that American International Group Inc. obtained from National Indemnity Co. does not represent the lone material change to the Berkshire Hathaway Inc. subsidiary's retroactive reinsurance business to date in 2017.

An agreement stemming from Liberty Mutual Insurance Co.'s acquisition of Ironshore Inc. more than offset the impact of RSA Insurance Group Plc's commutation of an adverse development cover that it acquired three years ago. As such, National Indemnity's amount of retroactive reinsurance assumed as of Sept. 30 increased to a new high of $39.38 billion net of foreign currency adjustments, according to its quarterly statement, from $38.71 billion three months earlier.

Liberty Mutual Holding Co. Inc. reported in a third-quarter filing that the combined aggregate excess of loss agreement with National Indemnity took effect May 1, but the reinsurer first listed it among its retroactive reinsurance relationships in the Sept. 30 quarterly statement. The multilayer agreement provides coverage for substantially all of Ironshore's reserves related to pre-2017 losses.

The treaty's first layer included the transfer of $400 million of Ironshore reserves at the time of inception. The second layer amounts to adverse development coverage for 95% of $500 million in losses in excess of a $2.99 billion retention minus the amount of paid losses for the first five months of 2017.

National Indemnity put the amount of retroactive reinsurance assumed under the agreement at $765 million as of Sept. 30. Liberty Mutual said it paid $550 million in consideration for the agreement.

Liberty Mutual already ranked as the third largest retroactive reinsurance cedant to National Indemnity under an agreement it entered in July 2014. National Indemnity reported assuming $6.06 billion from Liberty Mutual as of Sept. 30, an amount that trailed only the $16.45 billion that the reinsurer associated with the AIG adverse development cover and the $7.08 billion it assumed under a longstanding treaty involving the pre-1993 liabilities of Equitas Ltd. National Indemnity assumes 80% of up to $25 billion in excess of a $25 billion retention of a portfolio of pre-2016 U.S. commercial long-tail liabilities under the AIG deal.

The existing Liberty Mutual agreement provided coverage for substantially all of the cedant's pre-2014 U.S. workers' compensation and asbestos and environmental liabilities. It has an attachment point of $12.52 billion of combined aggregate reserves with an aggregate coverage limit of $6.5 billion, subject to sublimits of $4.51 billion for workers' comp business and $3.10 billion for asbestos and environmental exposures. Liberty Mutual paid $3.05 billion in total consideration.

The Ironshore agreement ranks as National Indemnity's eighth largest retroactive reinsurance treaty by the amount assumed as of Sept. 30, trailing the aforementioned three arrangements and treaties with AIG's Eaglestone Reinsurance Co. covering pre-1986 asbestos liabilities, each of CNA Financial Corp.'s Continental Casualty Co. and The Hartford Financial Services Group Inc.'s Hartford Fire Insurance Co. regarding asbestos and environmental liabilities, and an agreement with an Aviva Plc subsidiary involving pre-1987 asbestos and environmental exposures.

The deal with RSA's Royal & Sun Alliance Insurance Plc had ranked as National Indemnity's ninth largest retroactive reinsurance relationship as of Dec. 31, 2016. Although National Indemnity did not include a breakdown of its individual retroactive reinsurance relationships in its March 31 quarterly statement, Royal & Sun Alliance no longer appeared on the list in the June 30 quarterly statement.

RSA took a loss of £22 million earlier in 2017 on the commutation of an adverse development cover it acquired in 2014 to provide protection for its U.K. legacy book of business. The agreement, which RSA valued at £550 million at inception, covered pre-2013 liabilities and RSA retained 20% of the exposure. RSA touted the agreement in 2014 as offering protection against material adverse reserve volatility and providing significant benefits from a capitalization perspective, but it was no longer required as a result of the company's agreement to transfer legacy liabilities to Enstar Group Ltd.

National Indemnity's $1.14 billion net underwriting loss for the third quarter largely reflected the impacts of approximately $1.6 billion of pretax incurred losses and loss adjustment expenses from hurricane activity. The company recorded a $6.07 billion loss on retroactive reinsurance assumed through the first nine months of 2017, mostly due to the initial first-quarter accounting for the AIG cover, but it also included a loss of approximately $202 million in the third quarter.