Warren Buffett’s Berkshire Hathaway Inc. (A:US) agreed to backstop as much as $6.5 billion of Liberty Mutual Holding Co.’s obligations tied to asbestos, environmental and workers’ compensation policies.
Liberty Mutual said in a statement today that it paid Omaha, Nebraska-based Berkshire’s National Indemnity Co. about $3 billion for the coverage.
Berkshire has assumed billions of dollars in asbestos risk from insurers including CNA Financial Corp. (CNA:US) and American International Group Inc. over the last decade. The contracts are a bet that Buffett’s company can generate profit by investing policy (2FA:US) reserves and managing claims that will stretch out for years.
“So far, it’s been a decent deal” for Berkshire to take on these liabilities, said Greggory Warren, an analyst with Morningstar Inc. (MORN:US) “Asbestos is very long-tailed, so the ultimate issue will be how much the payouts end up being.”
The coverage accounts for almost all of Liberty Mutual’s U.S. workers’ compensation, asbestos and environmental liabilities, the Boston-based company said in the statement. National Indemnity’s policy won’t pay out until Liberty Mutual has exhausted $12.5 billion of reserves.
Workers’ compensation has challenged U.S. insurers amid climbing medical costs and low interest rates that make it hard for carriers to generate investment income from the premiums they hold. The industry has posted underwriting losses in the segment every year since 2007, according to data from the National Council on Compensation Insurance Inc.
Liberty Mutual has been scaling back its exposure to workers’ compensation coverage as it seeks to underwrite more profitable lines of business and expand internationally.
“This agreement further strengthens our financial position as it eliminates a substantial source of uncertainty in these liabilities,” Liberty Mutual Chief Executive Officer David H. Long said in the statement.
Standard & Poor’s raised Liberty Mutual’s credit rating one grade to BBB, two levels above junk, after the announcement. The deal “largely mitigates” the insurer’s risk of having to add to reserves and reduces earnings volatility, the ratings company said in a statement.
Liberty Mutual’s $750 million of 6.5 percent unsecured bonds were little changed at 124.3 cents on the dollar at 11:35 a.m. in New York, before the Berkshire deal was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities, which are due in 2042, yield 4.9 percent.
As chairman and CEO, Buffett, 83, fueled Berkshire’s growth over the last five decades by investing insurance premiums in stocks and takeovers. The company’s dozens of operating businesses now span the transportation, energy, manufacturing and retail industries.
Berkshire Class A shares slipped 1.2 percent to $189,811 at 4:15 p.m. in New York. Buffett’s company is the fifth-largest in the world by market value. Liberty Mutual is owned by its policyholders.
TigerRisk Partners and Skadden, Arps, Slate, Meagher & Flom LLP advised Liberty Mutual.
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