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NEW YORK American International Group Inc has agreed to pay roughly $10.2 billion to Warren
Buffett’s Berkshire Hathaway Inc to take on many
long-term risks on U.S. commercial insurance policies it has
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 last year.
Berkshire’s National Indemnity Co unit, led by Buffett’s
reinsurance chief Ajit Jain, will take on 80 percent of net
losses in excess of the first $25 billion, with a maximum
liability of $20 billion.
AIG said the payment comprises $9.8 billion plus interest
since Jan. 1, 2016, and will be made by June 30.
The transaction helps AIG Chief Executive 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 in a statement.
For Buffett, the transaction boosts how much his Omaha,
Nebraska-based conglomerate can invest, including stocks and
Berkshire’s float, which helps fund growth and reflects the
premiums collected upfront before claims are paid, totaled $91
billion on Sept. 30.
In a research note, Barclays Capital analyst Jay Gelb said
the transaction’s long-term economics should be “attractive” for
But Gelb and UBS analyst Brian Meredith said the transaction
may signal lingering problems in AIG’s portfolio, even after a
$3.6 billion 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 recognized a $2.9 billion
loss had the transaction occurred a year ago.
The payment to Berkshire represents nearly 3 percent of
AIG’s investment portfolio.
AIG will retain authority to handle and resolve claims,
similar to an arrangement that Hartford Financial Services Group
Inc struck when it passed some asbestos liabilities to
National Indemnity this month.
National Indemnity in 2014 reached a similar reinsurance
transaction with Liberty Mutual covering $6.5 billion of
liabilities, but took responsibility for resolving asbestos and
In afternoon trading, AIG shares rose 13 cents to $66.42,
while Berkshire Class A shares rose $690 to $239,550.
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