Kemper President and Chief Operating Officer William D. Smith explained the deals, noting that the first step was for Kemper's Lumbermens Mutual Casualty Company to create a downstream stock holding company called Kemper Insurance Group, Inc. That company, in turn, owns a downstream insurance company licensed only to do reinsurance in Illinois. Lumbermens contributed $700 million in capital to the holding company, representing an 85 percent share. Berkshire's $125 million represents the other 15 percent.

Mr. Smith said 100 percent of the balance sheet of the "go-forward commercial business" of Kemper is going to be ceded from Lumbermens to the new insurer, in a transaction that is subject to regulatory approval. "That's essentially everything" on a go-forward basis, he said, noting that Kemper sold its personal lines renewal rights to Unitrin in Chicago last month for some $45 million.

He said that the cession of the balance sheet is one aspect that made the deal more attractive to investors than putting money into offshore start-ups, noting that the reserves will generate investment income. A representative of Berkshire-Hathaway referred all questions to Kemper.

Mr. Smith said Lumbermens will also cede 80 percent of the premiums of its go-forward commercial business. Lumbermens retains all the employees and licenses and appoints all the agents.

Turning to the reinsurance agreements between Berkshire and Lumbermens, he said there are three. One is a two-year quota-share ceding $535 million of the net premiums of the new reinsurer to Berkshire. Mr. Smith said Kemper expects to write roughly $2 billion, with Lumbermens retaining 20 percent and the new company retaining about $1.2 billion (80 percent minus the $535 million).

The quota share with Berkshire was done to get the net written premium down to a level supported by the surplus of the Kemper Companies, he said, noting that surplus fell roughly $550 million at year-end 2001. The decline related in large part to asbestos reserving issues, he said, noting that Berkshire also provided some reinsurance coverage to asbestos.

Karen Horvath, vice president-commercial lines for A.M. Best in Oldwick, N.J., said the 27.8 percent surplus drop, which followed a 24.5 percent drop a year earlier, also related to changes in accounting rules affecting how Kemper could account for some of its subsidiaries. She said the drop in surplus was what had concerned A.M. Best before the transaction.

Even considering the transaction, Best downgraded Kemper to "A-minus" from "A" last week, citing limitations on financial flexibility and the ongoing costs of reinsurance, among other things.

Mr. Smith and Ms. Horvath also described a second treaty with Berkshire as a $400 million adverse development cover on year-end 2001 non-asbestos and mass tort reserves of $3.5 billion. Mr. Smith said that the coverage plays to the interests of other investors that have expressed interest in investing in a new company. "Less sophisticated investors will worry about reserves," he said.

"I think there could be other investors," he said, noting that a number were and are still interested. Berkshire has an automatic right, at a set price, to modestly increase its participation and a right of first refusal on additional investments.

Mr. Smith said that after Sept. 11, an investment bank came in with the idea of investing in Kemper, which at the time was not a possibility because Kemper is a mutual insurer. The banker, he reports, noted that Kemper, unlike some offshore start-ups, already had the talent and distribution in place to take advantage of the market.

To allow for investments, Kemper would have to create a legal entity for others to invest in and completely reserve for asbestos, he said. Although Mr. Smith reports that Kemper was working with five or six other investors, he noted that Berkshire stepped in and said they could quickly do all that was required.

Mr. Smith, who in the past told National Underwriter that being a mutual was a distinguishing feature of Kemper, said that demutualization could now be in the insurer's future. Mutuality served the company well over the past couple of years, he said. "If we hadn't been a mutual, we couldn't have done what we did," he added, referring to five years of restructuring and bringing in intellectual capital. "Shareholders wouldn't have put up with that."

But with all those actions completed, "there's a real issue around whether we can generate sufficient capital to support growth, especially if the current rate environment continues," he said, noting the board has met several times to discuss whether it is appropriate to remain a mutual. "That's an open question now."

Mr. Smith described a final treaty as a catastrophic risk runoff treaty on personal lines business. "We didn't want to do all this financial engineering and restructuring and have a big windstorm claim hit the homeowners book this summer, while it's running off," he said.