Berkshire Hathaway cements ADC dominance with Navigators deal
Transaction guarding against reserve deterioration mirrors a similar cover bought by Liberty Mutual when acquiring Ironshore in 2017
Berkshire Hathaway remains the favoured provider of adverse development covers (ADCs) and similar contracts protecting the largest US insurers.
It cemented this position with its latest reinsurance deal, struck last month, to help Hartford with the purchase of Navigators.
National Indemnity, a Berkshire Hathaway company, is providing reinsurance of $300m excess of $1.916bn to guard against deterioration in reserving levels at Navigators. The excess point is $100m above Navigators’ reserving level at December 31.
The agreement covers accident year 2018 and earlier. Hartford is paying about $91m pre-tax, $72m after tax for the protection.
Hartford expects to complete a further review of Navigators’ reserving levels in 30 to 45 days after the acquisition of the company, which took place on May 23.
For the first quarter this year, Navigators slumped to a net loss of $1.7m after suffering an underwriting deficit of $43.5m. Reserve additions of $50.4m were to blame for the loss. Of the total strengthening, US operations accounted for $26.6m, driven by the marine book; international operations needed $16.8m, mostly owing to professional liability business; and the inwards reinsurance account added $8.9m.
Hartford was already a good customer of Berkshire Hathaway, having bought an ADC in 2017 providing protection of $1.5bn of asbestos and environmental (A&E) deterioration above the net carried reserves of $1.7bn at the end of 2016. That cover cost Hartford $650m.
As at March 31, Hartford had incurred $523m in cumulative adverse development on reserves ceded under the treaty, leaving about $977m of cover remaining for future deterioration.
The Navigators protection is similar to a deal Berkshire Hathaway struck with Liberty Mutual when that company acquired Ironshore in 2017. National Indemnity covered almost all of Ironshore’s reserves on losses occurring before January 1, 2017. The first layer of the contract transferred $400m of reserves and under the second layer Berkshire Hathaway covers 95% of $500m above a retention of $2.991bn. The premium was $550m.
Liberty Mutual also bought an ADC in 2014 to protect its workers’ compensation account, providing $6.5bn of reinsurance above $12.522bn.
CNA turned to Berkshire Hathaway in 2010 to protect itself against A&E deterioration, buying $4bn of cover at a cost of $2.2bn. As at the end of March this year, a total of $3.1bn had been ceded under the treaty.
Berkshire Hathaway’s largest ADC is a $20bn deal effected in 2017 covering most of AIG’s long-tail casualty book pre-2016. The protection is excess of carried reserves of $25bn and provides 80% of $25bn of protection. The premium to Berkshire Hathaway was about $9.8bn. As at March 31, relevant claims remain below the attachment point.
At March 31, Berkshire Hathaway booked $41.8bn in unpaid losses and expenses related to retroactive contracts. The company wrote no new retroactive business during the first quarter.