CNA Financial Corp. recently entered into an agreement with National Indemnity Co. ("NICO"), a Berkshire Hathaway subsidiary, under which NICO will issue $4 billion in retroactive reinsurance covering CNA's asbestos and environmental liabilities in exchange for a $2 billion premium. Ratings agencies view the transaction as a favorable development for CNA, as it removes the uncertainty regarding CNA's reserves for environmental and asbestos claims, transferring the risk of increased environmental and asbestos exposure to NICO. It is less clear whether this is a positive development for policyholders with environmental and asbestos claims under CNA historical occurrence policies. According to reports, NICO will assume responsibility for claims handling. Our experience with NICO is checkered and suggests that NICO's business model is premised on making more money by investing the "float" (i.e., CNA's asbestos and environmental reserves and any surplus) than it pays out in claims. NICO has entered into similar transactions with a number of run-off insurers, including Equitas, Century Indemnity Company, One Beacon, and Seaton Insurance Company. After each such transaction, NICO has transferred claims handling responsibility to Resolute Management, Inc., also a Berkshire Hathaway subsidiary.
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