Reinsurer Swiss Re has announced that its dispute with Warren Buffett’s Berkshire Hathaway regarding a 2010 life retrocession deal has now been settled. The settlement will see Swiss Re take back some of the life exposure included in the retro deal and the reinsurer will receive a payment of $610m from Berkshire Hathaway. The terms of the retro contract have also changed and Berkshire will now only provide protection for $1.05 billion of losses, down from $1.5 billion of coverage.
In January 2010, Swiss Re entered into the life retrocession transaction with Berkshire Hathaway for a defined portfolio of Swiss Re’s pre-2004 yearly renewable term life business. The transaction was in two parts: a co-insurance agreement in which Swiss Re Life & Health America retroceded a book of business to Berkshire Hathaway; as well as a stop-loss agreement which was designed to limit Berkshire Hathaway’s exposure from the ceded business to $1.5 billion.
The dispute came to light in December when it was reported by the financial press. Berkshire Hathaway felt that the losses it had suffered on the book of life reinsurance business it had assumed were greater than had been expected. It recorded a pre-tax loss of $642m in 2011 due to mortality rates exceeding expectations under the quota share type deal.
Swiss Re had said that it might take the case to arbitration but it seems that a settlement has been reached without the need for a trip to the courts.
Under the terms of the agreed settlement, Swiss Re will recapture some of the treaties included in the retro deal, reducing the exposure Berkshire Hathaway holds, and will also receive the $610m payment from Berkshire as well. Swiss Re said that this is expected to lead to an initial gain of around $100m for the first quarter of 2013.
The life retro agreement remains in place for the rest of the ceded business.
Swiss Re noted in its announcement on the settlement that at this stage it cannot forecast whether the treaties it has taken back will continue to suffer losses, at what rate those losses may come in and whether the payment from Berkshire Hathaway will be sufficient to cover any losses.
It’s good to see settlement being reached quickly in this case. However the fact that mortality rates on the book of business exceeded expectations perhaps suggest that it may have been better to structure the retro transaction differently or to have used a different structure entirely. The mortality risk could perhaps have been hedged through a catastrophe bond type ILS transaction, offloading that risk to capital markets investors in a similar fashion to Swiss Re’s Vita Capital series of deals. Given the greater than expected mortality experience of the ceded life business it may even have been triggered and paid out to Swiss Re.
It will be interesting to see whether Swiss Re puts any other risk transfer arrangement in place to protect itself against the life treaties it has taken back from Berkshire Hathaway.