Tuesday, January 3, 2017

THE INSURERS CANNOT GET THEIR ACT TOGETHER: Asbestos and environmental exposures have generated adverse loss reserve development over time

The Hartford Signs $1.5 Billion Reinsurance Deal Covering Asbestos Liability
January 3, 2017

The Hartford has signed a reinsurance agreement effective Dec. 31, 2016 with National Indemnity Co. (NICO), a subsidiary of Berkshire Hathaway Inc., for a $1.5 billion aggregate excess of loss reinsurance agreement covering certain of The Hartford’s asbestos and environmental liability exposures. The company said the reinsurance premium for this agreement is $650 million.

The agreement covers potential adverse development on The Hartford’s existing asbestos and environmental reserves as of Dec. 31, 2016, excluding those held by the company’s U.K. property/casualty run-off subsidiaries, which the company is under contract to sell to Catalina Holdings Ltd. and currently expects to close in first quarter 2017.

The agreement provides up to $1.5 billion of reinsurance for adverse net loss reserve development above estimated net loss reserves of $1.7 billion as of Dec. 31, 2016.

The Hartford said it will continue to handle claims, subject to certain conditions, and will retain the risk of recoveries under third-party reinsurance contracts for these exposures.

“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, most of which were underwritten prior to 1985,” said Chief Financial Officer Beth Bombara.

He said the agreement “reduces uncertainty about potential adverse development” while allowing The Hartford to continue to handle both claims and reinsurance recoveries, which it believes will enable it to “achieve the best possible resolution for these long-tail exposures.”

The agreement will be accounted for as a retroactive reinsurance agreement, resulting in a charge of approximately $423 million, after-tax, against fourth quarter 2016 net income. The reinsurance premium is expected to have a slightly negative impact on 2017 P/C net investment income.

Mayer Brown represented The Hartford in the agreement.

Last year the insurer said a review of asbestos and environmental policies showed that the company needed to add to reserves because of higher-than-expected legal costs. In July the insurer announced a deal in which Catalina Holdings Ltd. agreed to take on its book of asbestos-related liabilities in the U.K.

Catalina Holdings UK Ltd. agreed to buy the insurer’s Downlands Liability Management Ltd. (DLM) and Hartford Financial Products International Ltd. (HFPI), which is U.K. business that has been largely in runoff since 1993. As of March 31, DLM and HFPI had total assets of about $1 billion, undiscounted gross reserves of $686 million, undiscounted reserves net of reinsurance of $516 milion, and shareholders’ equity of $321 million, all on a U.S. GAAP basis.