Berkshire Gets $2 Billion to Take CNA's Asbestos Risk
Berkshire Hathaway chief executive officer Warren Buffett. Photographer: Daniel Acker/Bloomberg
July 15 (Bloomberg) -- Bloomberg's Betty Liu reports on the latest breaking news and top stories in today's Business Briefs. (Source: Bloomberg)
Warren Buffett’s Berkshire Hathaway Inc. agreed to assume liabilities tied to asbestos and pollution claims from commercial insurer CNA Financial Corp. in exchange for a $2 billion fee.
Berkshire will assume about $1.6 billion of net liabilities in the deal, which is expected to be completed this quarter, Chicago-based CNA said today in a statement distributed by Business Wire. CNA said it expects a loss of about $375 million on the reinsurance transaction.
Buffett is taking the risk on claims that could take years to resolve in exchange for fee income and access to insurance reserves that he can invest. In 2006, Berkshire agreed to assume asbestos risks previously held by Lloyd’s of London investors in exchange for about $7 billion. The company’s financial strength allowed Buffett, 79, to negotiate favorable terms from CNA, said Meyer Shields, an analyst with Stifel Nicolaus & Co.
“There’s no other insurance entity out there that can present the same level of security” as Berkshire, Shields said in an interview. “And that level of security is reflected in the significant underwriting profit Berkshire is getting,” he said, referring to the difference between the assets Berkshire will receive and the liabilities it agreed to assume.
Berkshire’s National Indemnity Co. will take responsibility for handling claims and may be able to collect reinsurance with a book value of about $200 million from third parties. The liabilities have a limit of $4 billion, and National Indemnity will deposit $2.2 billion in a collateral trust for the benefit of CNA, according to the statement.
Underwriting, Investing
Buffett built Omaha, Nebraska-based Berkshire over four decades as chief executive officer by investing the premium generated by insurance units. Berkshire sells car coverage through Geico Corp. and protection for other carriers through its General Re subsidiary. Last year, insurance underwriting and investing accounted for about 30 percent of Berkshire’s revenue and 61 percent of its profit, according to Bloomberg data.
CNA, which is majority owned by Loews Corp., hired Thomas Motamed from Chubb Corp. last year as the company recovered from its first annual loss in five years in 2008. The insurers that cede risk through reinsurance can refocus on selling new policies.
“This transaction is consistent with our focus on financial stability and delivering improved levels of operating consistency as we effectively eliminate a significant source of uncertainty from these legacy liabilities,” Motamed said in the statement.
Berkshire holds the second-highest credit grade at Standard & Poor’s and the third-highest at Moody’s Investors Service. CNA has the No. 10 rating at Moody’s.
CNA slipped 24 cents to $26.98 at 9:32 a.m. in New York Stock Exchange composite trading. Berkshire advanced $124 to $119,144.
To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.
Rate These Stories
Rate this Page