AIG to pay Berkshire $10bn in reinsurance deal
American International Group (AIG) has agreed to pay about $10.2bn to Warren Buffett’s Berkshire Hathaway to take on many long-term risks on US commercial insurance policies it has already written.
The reinsurance transaction covers “long-tail” exposures, which are liabilities that emerge long after policies are issued, from excess casualty, workers’ compensation and other AIG policies issued before 2016.
Berkshire’s National Indemnity unit, led by Buffett’s reinsurance chief Ajit Jain, will take on 80% of net losses in excess of the first $25bn, with a maximum liability of $20bn. AIG said the payment comprised $9.8bn plus interest since January 1 2016, and would be made by June 30.
The transaction helps AIG CE Peter Hancock lower risk at his New York-based insurer, which has reduced exposures and shed businesses since its 2008 federal bailout, and frees up capital for share buybacks. “This decisive step enables us to focus firmly on the future,” with “additional risk capacity to serve our clients and return capital to shareholders”, Hancock said.
For Buffett, the transaction boosts how much his Omaha, Nebraska-based company can invest, including stocks and whole companies.
Berkshire’s float, which helps fund growth and reflects the premiums collected upfront before claims are paid, totalled $91bn on September 30.
In a research note, Barclays Capital analyst Jay Gelb said the transaction’s long-term economics should be “attractive” for Berkshire.
But Gelb and UBS analyst Brian Meredith said the transaction might signal lingering problems in AIG’s portfolio, even after a $3.6bn charge in late 2015. “This announcement indicates that there may be more pain left,” wrote Meredith, who rates AIG “neutral”. Gelb rates it “overweight”.
Berkshire did not respond to requests for comment.
AIG plans to take a charge in the just-completed quarter for the transaction. It said it would have recognised a $2.9bn loss had the transaction occurred a year ago. The payment to Berkshire represents nearly 3% of AIG’s investment portfolio.
AIG will retain authority to handle and resolve claims, similar to an arrangement that Hartford Financial Services Group struck when it passed some asbestos liabilities to National Indemnity in January. National in 2014 reached a similar reinsurance transaction with Liberty Mutual covering $6.5bn of liabilities, but took responsibility for resolving asbestos and environmental claims.