Liberty Mutual liability reinsurance deal with Berkshire Hathaway raises questionsReprints
Liberty Mutual Insurance Co.'s deal to reinsure billions of dollars in long-tail liabilities through Berkshire Hathaway Inc.'s National Indemnity Co. results in a financial boost for Liberty Mutual, but might mean slower claim payments for policyholders.
Liberty Mutual last month said it entered into a multibillion-dollar retroactive reinsurance deal with National Indemnity to cover “substantially all” of Liberty Mutual's “U.S. workers compensation, asbestos and environmental liabilities.”
Liberty Mutual paid $3 billion to National Indemnity in a deal effective Jan. 1 of this year. Liberty Mutual ceded $3.3 billion in existing workers comp, asbestos and environmental liabilities. National Indemnity also is providing about $3.2 billion in additional adverse development reinsurance to Liberty Mutual, the insurer said in statement.
Liberty Mutual said it will continue to handle its workers comp claims, while National Indemnity will handle claims for asbestos and environmental policies.
As a result of the deal, it may take longer to get claims paid, experts say.
“The thing that I'd be concerned about from a policyholder perspective, since this is now Berkshire Hathaway's money that's going to be used to pay the workers comp claims, is whether that would have some kind of an influence over the way that Liberty Mutual handles the claims,” said Paul R. Walker-Bright, a partner and insurance recovery attorney at Reed Smith L.L.P. in Chicago.
“What we've seen before is that when Berkshire Hathaway does step in and they're ultimately responsible for some of these longer-tail liabilities, the time to get claims paid does lengthen,” said Jeremy M. King, a partner and insurance coverage attorney at Olshan Frome Wolosky L.L.P. in New York.
The reinsurance deal “further strengthens our financial position by removing a source of uncertainty about our workers compensation, asbestos and environmental liabilities,” a spokeswoman for Liberty Mutual said in an email, adding that it will continue to write workers comp policies.
Insurance Information Institute Inc. President Robert Hartwig said such deals are not unusual for insurers that want to reduce their liability for asbestos and liability claims, calling it a “win-win” for both sides.
“It removes a source of volatility for Liberty Mutual's balance sheet,” Mr. Hartwig said. “On the National Indemnity side, they will be able to invest the cash ... in a way that's consistent with how Berkshire Hathaway often operates. They take advantage of the float for investment purposes.”
Rating agency Standard & Poor's Corp. reacted by boosting its rating of Liberty Mutual Insurance Co. to A/A-1 from A-/A-2, saying the deal “largely mitigates potential risks from future adverse reserve developments.”
Still, insurance attorneys say Liberty Mutual policyholders affected by the deal should be watchful of how their claims are handled, citing employer lawsuits contending that National Indemnity improperly delayed or denied claim payments.
For instance, Ford Motor Co. sued National Indemnity in 2012 in U.S. District Court in Richmond, Virginia, alleging that National Indemnity denied payments for liability claims it reinsured on behalf of German insurer HDI-Gerling Industrie Versicherung A.G. National Indemnity agreed last October to pay $22.1 million to Ford in a settlement, according to media reports.
In a statement last October, Berkshire Hathaway said news reports alleging that it inappropriately delayed or denied reinsured claim payments contained “material inaccuracies and misleading statements.”
While Liberty Mutual has agreed to continue handling its workers comp claims, “the company that's controlling the purse strings arguably might have an ability to influence the way those claims are handled,” Mr. Walker-Bright said of National Indemnity. “I think it will come down to who is really sort of controlling the claims.”
Mr. King said Liberty Mutual workers comp policyholders may not notice a difference in claims handling, but there's reason to watch for changes. “I think there might be cause for hope there that ... the same people will be handling the claims as before under the same instructions, but as far as I know, there's no guarantee of that,” he said.
Still, Mr. Hartwig said he expects Liberty Mutual policyholders won't see much change with National Indemnity backing their coverage.
Calls to Berkshire Hathaway were not returned last week.