Swiss Re settles life retrocession agreement dispute with Berkshire Hathaway

Swiss Re to recapture certain treaties, Berkshire Hathaway to make payment of $610 mn to Swiss Re

Global reinsurer Swiss Re has settled a dispute with Warren Buffet-led 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 $610 million (Rs 3,306.2 crore approximately) to Swiss Re.

A statement by Swiss Re said that this is expected to lead to an initial gain of approximately $100 million (Rs 452 crore approximately) 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 $1.05 billion (Rs 5,691 crore approximately) under the contract compared to $1.5 billion (Rs 8130 crore approximately) in the original agreement.

Retrocession refers to a process where one reinsurer reinsures risk for another reinsurance company. This is done to reduce risks by spreading it out and thereby reducing the liability burden for an insurance company.

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 which limited Berkshire Hathaway's exposure in the overall transaction to $1.5 billion. Both covers were effective from October 1, 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.

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. The statement by the Swiss Re said that 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," it said. The total recoveries from Berkshire Hathaway to date, including the recapture payments agreed as part of this settlement, are $815 million (Rs 4417.3 crore approximately).