Swiss Re announced that the reinsurer has settled a dispute with Berkshire Hathaway over a life retrocession agreement dating back to 2010, with Swiss Re taking back some risks and getting a payment of $610 million from Berkshire.
The initial net impact of the settlement on Swiss Re’s books will be a first-quarter gain of roughly $100 million, Swiss Re said in a statement. The $100 million estimate results from a combination of the $610 million payment received for Swiss Re taking back some of the treaties that were covered under the retrocession, re-establishing reserves and unwinding the reinsurance recoverable, the statement explained.
Under terms of the settlement, the amount of losses Berkshire will assume has been reduced to $1.05 billion, compared to $1.5 billion in the original agreement.
Giving the history of the retrocession agreement, Swiss Re said it was entered into in January 2010, and covered 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 $ 1.5 billion.
Both covers were effective Oct. 1, 2009. At the time the deal retrocession was originally announced in January 2010, Swiss Re said the retrocession was a “step forward” in a strategy to increase capital efficiency, describing the retrocession as a way for Swiss Re to monetize intangible assets and free up capital.
In a more significant deal (in dollar terms) announced in February 2009, Swiss Re received a capital infusion from Berkshire of $2.6 billion, after reporting a bottom line loss of over $860 million for 2008.
Aside from the treaties Swiss Re has agreed to recapture, the life retrocession agreement for the pre-2004 yearly renewable term life business remains in force.
The settlement resolves damages alleged by Berkshire, which Swiss Re had reported on in a note to its financial statements.
Looking past the first quarter, Swiss Re said the effect of the settlement will depend on the performance of the recaptured business and the business that remains covered by the original retrocession agreement, noting that the recaptured treaties had 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,” Swiss Re said.
Source: Swiss Re
(Editor’s Note: A prior version of this article incorrectly reported that Swiss Re’s net loss in 2008 was $860 billion. The correct figure is $860 million.)