Buffett's Risky Bet on Reinsurance

But the question is not whether National Indemnity settle this loss, but whether it expects to pay out so much so fast. How much will the company end up paying if figures this size are showing up soon after the agreement, and can it earn enough by investing the remaining premium to make a profit?

In exchange for assuming Equitas' exposure, National Indemnity received the U.K. reinsurers' $7.1 billion in assets. It also set aside an additional provision of $5.7 billion out of its own funds.

The aggregate limit of indemnification, or the maximum it will have to pay out, is approximately $13.8 billion. With a $2.2 billion recorded statutory loss as of first-quarter 2007, nearly 16% of the reserve that has been set up has already been used. National Indemnity declined to comment on its agreement with Equitas beyond the material in its statutory statement for the first quarter.

The Equitas deal accounts for just over half, or 53%, of National Indemnity's retroactive reinsurance business. Among its other deals is one entered into in March of this year to assume the liabilities of Sompo UK, a unit of Sompo Japan Insurance, through its own U.K. unit, Transfercom.

The transfer of liabilities involves business written between 1950 and 2001, including policies with substantial asbestos claims and significant exposure to the World Trade Center losses.