CHICAGO—CNA Financial Corp. has entered into an agreement with Berkshire Hathaway Inc.’s National Indemnity Co. unit under which, for a $2 billion reinsurance premium, it will cede $1.6 billion of net asbestos and environmental pollution liabilities to the unit.

The $4 billion aggregate limit under the retroactive reinsurance agreement with National Indemnity Co. will cover credit risk on existing third-party reinsurance related to the liabilities, CNA said Thursday.

Under terms of the deal, CNA also will transfer to National Indemnity the right to collect billed third-party receivables with a net book value of about $200 million. To secure its obligations, National Indemnity will deposit $2.2 billion in a collateral trust for the benefit of the CNA companies.

Omaha, Neb.-based Berkshire has guaranteed National Indemnity’s payment obligations up to the full aggregate reinsurance limit and also certain of National Indemnity’s performance obligations under the trust agreement, said CNA.

National Indemnity will assume responsibility for claims handling and collection from third-party reinsurers related to the asbestos and environmental pollution claims.

CNA Chairman and CEO Thomas F. Motamed said in a statement, “We believe 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.”

Observers say the deal removes a major overhang for CNA. Bret Howlett, an equities analyst with Standard & Poor’s Corp. in New York, noted that in 2009’s fourth quarter, CNA reported unfavorable net claim and claim adjustment expense reserve development of $79 million related to asbestos exposures and $76 million related to environmental pollution exposures. The insurer’s net asbestos and environmental pollution reserves totaled $1.4 billion in 2009.

“It just adds more consistency any time you have less uncertainty surrounding accounting charges and reserve development, especially when it comes to something like asbestos,” he said.

The transaction “does provide more of a certainty around (CNA’s) asbestos exposure,” said Brian Schneider, an analyst with Fitch Investors Service in Chicago. “It’s something they have been dealing with for quite a while” and now do not have to be concerned much about anymore, he said.

The $2 billion premium is a “sizeable amount,” but “given that it’s $4 billion of coverage, it’s a pretty big cushion for them to be able to withstand any further changes in the liability,” Mr. Schneider said.

Meyer Shields, principal at Stifel, Nicolaus & Co. Inc. in Baltimore, said, “CNA just doesn’t need the hassle of worrying about asbestos, and I would say from Berkshire’s perspective they’re certainly getting more value in assets than the current estimate of liabilities, and Berkshire’s capital level means that Berkshire can invest premiums more profitably, or aggressively than CNA could.” This “means that even if the loss estimates end up higher, they could more than make up the difference on the float.”

New York-based S&P, which made no change in CNA’s ratings, said in a statement that the agreement “transfers potential adverse reserve risk for liabilities that are highly correlated with an uncertain and volatile legal environment surrounding asbestos and environmental claims, thereby reducing CNA’s reserve risk.”

“We view it as a positive,” said W. Dolson Smith, an analyst with Oldwick, N.J.-based A.M. Best Co., which also left CNA’s ratings unchanged. These transactions are difficult to negotiate, and “it’s worked out in this case. Here, both sides obviously perceive they will achieve their financial objectives.”