Berkshire Hathaway may net a $2.6bn gain plus float from AIG deal

If ultimate losses remain unchanged, Berkshire Hathaway will net a gain of around $2.6 billion plus the float in its $9.8 billion US casualty reinsurance agreement with American International Group (AIG), analysts at CreditSights writing in a January 20 note.

AIG revealed last week it had entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway.

The  agreement covers 80 percent of substantially all of AIG’s US commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG’s US casualty exposures during that period. The consideration for this agreement is $9.8 billion payable in full by June 30, 2017, with interest at 4 percent per annum from January 1, 2016 to date of payment.

AIG is paying a “hefty sum” for the protection, analysts Rob Haines and Josh Esterov wrote in the note.

NICO is assuming 80 percent of the net losses and net allocated loss adjustment expenses on the subject reserves in excess of the first $25 billion and NICO’s overall limit of liability under the agreement is $20 billion.

According to AIG, reserves associated with the products covered in the reinsurance deal were approximately $34 billion. At 80 percent reimbursement, if reserves are accurate and remain stable, Berkshire has a net positive position of $2.6 billion, and will reimburse AIG $7.2 billion, Haines and Esterov said.

AIG may break even on the deal if future losses (ignoring interest and investment float) rise by a further $3.25 billion, the analysts wrote.

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