Hartford Signs $1.5 Billion Deal to Cover Asbestos Liability Exposures

Illustration of legal cases for asbestos and mesothelioma

Hartford Connecticut Financial Company signed a staggering $1.5 billion reinsurance agreement with National Indemnity Co. (NICO) to cover asbestos and environmental liability exposures. The premium for this agreement is $650 million and it will be effective on December 21, 2016.

The company sells commercial and personal insurance and financial products such as property and casualty insurance, group benefits, and mutual funds.

According to Hartford’s Chief Financial Officer Beth Bombara, “Our asbestos and environmental exposures have generated adverse loss revenue development over time, creating uncertainty for investors and others about the ultimate cost of these policy liabilities, most of which were underwritten prior to 1985.”

The deal will allow the company to continue to handle claims and retain the risk of recoveries under third-party reinsurance contracts for the exposures. It “reduces uncertainty about potential adverse development,” which lets Hartford “achieve the best possible resolution for these long-tail exposures,” said Bombara.

The deal is in place for the estimated net loss reserves of $1.7 billion as of the end of 2016. Higher-than-expected legal costs associated with Hartford’s asbestos and environmental policies were the primary reason for the agreement.

In the second quarter of 2016, Chief Executive Christopher Swift stated, “Greater-than-expected mesothelioma claim filing for certain defendants in asbestos cases helped push loss in the property and casualty ‘other’ category to $154 million from $111 million a year earlier. In the overall property and casualty unit, net income fell to $33 million from $189 million in last year’s quarter.”

The $1.5 billion does not cover the company’s U.K. property and casualty run-off subsidiaries. These asbestos-related liabilities are being sold to Catalina Holdings Ltd. in the first quarter of this year.

It costs about $1.2 billion for a pharmaceutical company to get from research to approval. As a result, mesothelioma treatment is particularly expensive costing tens to hundreds of thousands of dollars. These high costs for surgery, chemotherapy, and radiotherapy, as well as emerging therapies like immunotherapy, all contribute to the rising costs incurred by insurance companies like the Hartford.

According to a recent CBS News Report, cancer drugs cost more than $120,000 per individual annually—and that cost is expected to increase. With Medicare, the cost of cancer drugs can be negotiated, but the expense is still significant for beneficiaries who have an average household income of $22,000 per year.

A charge of about $423 million (after-tax dollars) will go against Hartford’s 2016 net income since it will be considered a retroactive reinsurance agreement. This will have a negative impact on the company’s 2017 property and casualty net investment income.