UPDATE 4-Berkshire takes on CNA asbestos risk

Thu Jul 15, 2010 12:00pm EDT

* CNA to pay Buffett's National Indemnity $2 billion fee

* $1.6 billion asbestos, pollution claims transferred

* CNA expects to incur $375 million loss

* Shares of Berkshire, CNA fall (Adds analyst comment)

By Jonathan Stempel

NEW YORK, July 15 (Reuters) - Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) will take over asbestos and environmental pollution risks now held by CNA Financial Corp (CNA.N) in exchange for a $2 billion fee.

Berkshire's National Indemnity Co unit will take over $1.6 billion of net liabilities retroactive to Jan. 1 and assume responsibility to handle claims, CNA said. The accord has a $4 billion limit and gives National Indemnity the right to collect $200 million of receivables.

CNA, the seventh-largest U.S. commercial insurer, is 90 percent-owned by conglomerate Loews Corp (L.N).

Berkshire's size lets Buffett take on insurance risks, such as hurricanes and terrorism, from other companies in exchange for upfront payments that he can invest elsewhere.

Buffett "understands insurance risks well, and can use the 'float' from the $2 billion to boost investment returns, perhaps before any claims would need to be paid," said Brian Schneider, a senior director at Fitch Ratings. "For CNA, transferring risk gives it more certainty."

In 2006, Berkshire took on $7.1 billion of claims from the Equitas affiliate of Lloyd's of London [LOL.UL], which Buffett said was created to handle asbestos claims and a "tidal wave" of environmental and product claims dating from the 1980s.

Insurance typically accounts for half of Berkshire's results, though Buffett has in recent years expanded in railroads, energy and industrial goods.

Asbestos exposure has long been a problem for insurers. While many companies had stopped using asbestos for fireproofing and insulation by the mid-1970s after it was linked to cancer and other diseases, litigation persists because after-effects from exposure to the substance can take decades to surface.

CNA said it expected to incur a $375 million after-tax loss when the Berkshire transaction closes later this quarter.

Chief Executive Thomas Motamed said in a statement that the transaction would "effectively eliminate a significant source of uncertainty" for the Chicago-based company.

Loews said it expects to realize a $340 million loss, reflecting its 90 percent stake in CNA.

An assistant to Buffett had no immediate comment. National Indemnity did not return a request for comment. Both companies are based in Omaha, Nebraska. Loews is based in New York.

AJIT JAIN

In its annual report, CNA said it had incurred $155 million of additional asbestos and environmental pollution exposure in 2009, citing larger claims, increased trial activity and changes in case law.

It said trends might worsen because lawyers who once sued companies that are now bankrupt seek out other targets, while court rulings on pollution claims have been "inconsistent."

Buffett, 79, is the world's third-richest person, according to Forbes magazine, and has run Berkshire since 1965.

Berkshire has about 80 operating businesses and tens of billions of dollars of common stock investments. It ended March with $25.67 billion of cash.

National Indemnity is overseen by Ajit Jain, whom analysts believe could succeed Buffett as Berkshire's chief executive.

Jain put together the Equitas transaction, and Buffett told shareholders in a February 2007 letter that despite uncertainty over the timing and size of potential claims arising from it, "Ajit and I think the odds are in our favor."

In morning trading, CNA shares fell 9 cents to $27.13; Loews shares fell 18 cents to $36.00; Berkshire Class A shares fell $570 to $118,450; and Berkshire Class B shares fell 38 cents to $78.97. (Reporting by Jonathan Stempel; Editing by Lisa Von Ahn and John Wallace)

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