Chartis to Shift Asbestos Liabilities to Berkshire’s National Indemnity

American International Group said today that its global property/casualty insurer Chartis will transfer the bulk of its legacy asbestos liabilities to National Indemnity Co. (NICO), a subsidiary of Berkshire Hathaway Inc.

Chartis said the transaction is part of its ongoing strategy to de-risk.

The transaction with NICO covers potentially volatile U.S.-related asbestos exposures. Chartis said it does not cover asbestos accounts that it believes have already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by Chartis affiliates.

At the closing of this transaction, but effective as of Jan. 1, 2011, Chartis will cede the bulk of its net asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Chartis will pay NICO approximately $1.65 billion in respect of the cession.

For those asbestos claims subject to the reinsurance from NICO, NICO will assume responsibility for claims handling. It will also assume collection responsibility and collectability risk for third-party reinsurance related to those claims, according to Chartis.

Peter Hancock, chief executive officer of Chartis, said the transaction will benefit Chartis “as it will reduce the risk of future adverse development of U.S. asbestos exposures, including the risk associated with the recoverability of related reinsurance.”

This transaction will be accounted for as retroactive reinsurance in Chartis’ consolidated financial statements and is expected to result in a deferred pre-tax gain of approximately $200 million in the second quarter of 2011.

The closing of the transaction is subject to receipt of required regulatory approvals and other conditions.

The asbestos deal comes after Chartis reported a fourth quarter operating loss of $4.0 billion, due to the reserve additions of $4.2 billion, compared to a loss of $1.8 billion in the fourth quarter of 2009. The fourth quarter reserve development drove most of the underwriting losses for the quarter and the year at Chartis. Approximately 80 percent of the total reserve charges were for four long-tail lines of business: asbestos, excess casualty, excess workers’ compensation, and primary workers’ compensation.

Last July, CNA Insurance announced a similar asbestos liability deal with National Indemnity for a payment of $2 billion.

In 2006, Berkshire took on $7.1 billion of claims from the Equitas affiliate of Lloyd’s of London.