Posted on 01 Apr 2013 by Neilson
Swiss Re has settled a dispute with Berkshire Hathaway over a life retrocession agreement which was concluded in 2010. Under the terms of the agreement reached with Berkshire Hathaway, Swiss Re will recapture certain treaties and Berkshire Hathaway will make a payment of USD 610 million to Swiss Re. This is expected to lead to an initial gain of approximately USD 100 million for Swiss Re in the first quarter of 2013. The limits under the contract have also been amended and Berkshire Hathaway will now assume total losses of up to USD 1.05 billion under the contract compared to USD 1.5 billion in the original agreement.
In January 2010, Swiss Re entered into a retrocession transaction with Berkshire Hathaway for a portfolio of Swiss Re's pre-2004 yearly renewable term life business. The transaction consisted of two parts: a coinsurance agreement in which Swiss Re Life & Health America Inc. retroceded a portfolio of business to Berkshire Hathaway; and a stop loss agreement extended by Swiss Reinsurance Company Ltd which limited Berkshire Hathaway's exposure in the overall transaction to USD 1.5 billion. Both covers were effective from 1 October 2009.
As previously reported under the commitments and contingent liabilities note to recent Swiss Re consolidated financial statements, Berkshire Hathaway served notice setting forth allegations of damages. As required by the contract, the parties met to discuss a solution which has now been reached.
Pursuant to the agreement reached with Berkshire Hathaway, Swiss Re will recapture certain treaties from the portfolio and in return will receive a payment of USD 610 million from Berkshire Hathaway.
The combination of the payment received for recapturing the treaties, re-establishing reserves and unwinding the reinsurance recoverable is expected to lead to a gain of approximately USD 100 million for the first quarter of 2013.
The limit of protection for Swiss Re has changed from USD 1.5 billion under the original agreement to USD 1.05 billion.
Other than for the recaptured treaties, the life retrocession agreement for the pre-2004 yearly renewable term life business, as concluded in 2010, remains in force.
Effect of the settlement on Swiss Re
The effect on Swiss Re's performance beyond the first quarter of 2013 as a result of the agreement reached with Berkshire Hathaway will depend on the performance of both the recaptured business and the business that remains covered by the original retrocession agreement. Prior to recapture, the treaties have been producing losses. This may continue until the performance improves or steps are taken to mitigate the causes of the losses. There is no assurance that the payments received from Berkshire Hathaway will be sufficient to cover future losses.
Total recoveries from Berkshire Hathaway to date, including the recapture payments agreed as part of this settlement, are USD 815 million.