Berkshire Hathaway Inc. and Swiss Re AG have commuted a reinsurance treaty that harkens back to a much different time in the financial markets.
The end to an agreement that was revealed in February 2009 signals a rare retreat in a retroactive reinsurance business of Berkshire's National Indemnity Co. that expanded dramatically in 2017.
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Per terms of the arrangement, Berkshire agreed to invest CHF3 billion in a Swiss Re capital instrument. It also provided an adverse development cover against up to CHF5 billion in pre-2009 nonlife claims in exchange for consideration of CHF2 billion. The cover had the effect of reducing Swiss Re's capital needs at a time in which its income statement and shareholders' equity had been reeling from mark-to-market investment losses in the throes of the global financial crisis.
Swiss Re had the option to commute the agreement starting on its eighth anniversary. That date came and went, but National Indemnity revealed in the notes to its 2017 annual statutory statement that the parties agreed to a commutation valued at CHF400 million on what amounts to the deal's ninth anniversary.
Upon announcing the reinsurance agreement Swiss Re officials said they viewed it as providing protection against future volatility and, in particular, the possible effects of inflation. The adverse development cover was separate and distinct from the more traditional January 2008 quota-share treaty through which National Indemnity agreed to assume 20% of all Swiss Re property and casualty risks incepting over a five-year period.
National Indemnity reported the assumption of $2.03 billion of reserves under retroactive reinsurance transactions with various Swiss Re entities as of year-end 2009, including $1.89 billion from Swiss Reinsurance Co. Ltd. The amounts attributable to Swiss Reinsurance Co. individually, or the Swiss Re entities collectively, represented National Indemnity's second-largest retroactive reinsurance arrangements at the time, trailing only its relationship with Equitas Ltd., the vehicle formed to manage pre-1993 nonlife Lloyd's of London liabilities.
The amounts assumed from Swiss Re under the adverse development cover declined over time such that they totaled $386.9 million from Swiss Reinsurance Co. and $47.4 million from Swiss Reinsurance America Corp. at year-end 2017. National Indemnity put the total amounts assumed from Swiss Re entities under retroactive reinsurance agreements at $458 million. It reported that the commutation would settle in the first quarter.
Swiss Re representatives did not return a message seeking comment.
This is not the first commutation of a National Indemnity retroactive reinsurance relationship. Royal & Sun Alliance Insurance Plc, for example, commuted an adverse development cover in 2017 that had provided protection regarding pre-2013 liabilities on the cedant's U.K. legacy book of business as it transferred related risks to Enstar Group Ltd.
National Indemnity assumed only about $499 million under the Royal & Sun Alliance agreement as of year-end 2016, so the end of that transaction served as a very modest partial offset to the massive retroactive reinsurance transaction the company entered in 2017 with various American International Group Inc. units. That deal involved National Indemnity's assumption of 80% of up to $25 billion in excess of a $25 billion retention of AIG's pre-2016 U.S. long-tail commercial lines liabilities for consideration of $10.19 billion.
Berkshire Chairman and CEO Warren Buffett in his annual letter to shareholders characterized the premium that AIG paid for the cover as a "world's record," and one that his company "won't come close to repeating."
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The AIG treaty was largely responsible for growth in National Indemnity's assumed retroactive reinsurance reserves to $41.37 billion net of foreign currency adjustments at the end of 2017 from $22.95 billion a year earlier. A separate transaction involving pre-2017 losses of Liberty Mutual Holding Co. Inc.'s Ironshore Insurance Ltd. contributed to the expansion.
National Indemnity assumed $18.24 billion under the most recent AIG cover as of Dec. 31, 2017. A separate deal involving AIG"s pre-1986 asbestos liabilities involved assumptions of $1.80 billion. The AIG-related assumptions totaled $16.45 billion and $1.82 billion, respectively, as of Sept. 30, 2017.
The Swiss Re relationship ranked as National Indemnity's 11th-largest retroactive reinsurance agreement based on the amounts of reserves assumed from individual counterparties at the end of 2017. In addition to the aforementioned transactions, National Indemnity maintained large relationships mostly focused on years-old latent liabilities with the likes of Liberty Mutual Insurance Co., CNA Financial Corp.'s Continental Casualty Co. and The Hartford Financial Services Group Inc.'s Hartford Fire Insurance Co.


