Warren Buffett’s Berkshire has done its second big reinsurance deal with a major US underwriter this month with an arrangement similar in nature to the 2015 agreement with Insurance Australia Group.
AIG (American International Group Inc) has agreed to pay roughly $US10.2 billion to Buffett’s Berkshire Hathaway to take on many long-term risks on US commercial insurance policies it has already written.
The deal and a smaller one with another insurer earlier this month will boost the size of Berkshire’s ‘float’ or free cash holdings past $US100 billion, and spark renewed speculation about the chances of Buffett making another major takeover in 2017.
A year ago Berkshire completed its biggest ever deal, the $US37 billion acquisition of high tech parts maker, Precision Castparts.
The reinsurance transaction covers so-called “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 will take on 80% of net losses in excess of the first $US25 billion, with a maximum liability of $US20 billion.
AIG said the payment comprises $US9.8 billion plus interest since January 1, 2016, and will be made to Berkshire by June 30.
Back in 2011 AIG paid Berkshire Hathaway $US1.65 billion to take on its remaining risk in exchange for re-insurance protection worth up to $US3.5 billion. Any further exposure beyond that limit would be absorbed by AIG.The latest deal expands that significantly because of the growth in asbestos related liabilities in the past five years in the US.
AIG will handle and resolve all primary claims, similar to the $US1.5 billion arrangement that Hartford Financial Services Group 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 $US6.5 billion of liabilities, but took responsibility for resolving asbestos and environmental claims.
Berkshire struck a 20% quota share deal with IAG and took a 3.7% stake in the largest general insurer in Australasia. That deal sees Berkshire take 20% of IAG’s annual premiums in exchange for meeting 20% of IAG’s insurance claims.
It was a deal designed to reduce IAG’s earnings volatility, delivers capital stability and turns a 15 year reinsurance arrangement into a more permanet deal that does not have to be negotiated.
The quota share arrangement will reduce IAG’s exposure to the geographic concentration of insurance risk in Australia and New Zealand, lowering IAG’s future catastrophe reinsurance needs and its exposure to potential volatility in reinsurance rates.
IAG expects the quota share arrangement will result in a reduced capital requirement of approximately $700 million over the next five years.
For Buffett, the AIG and Hartford transactions boosts how much his Omaha, Nebraska-based conglomerate 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 $US91 billion on September 30. That will now total more than $US100 billion by June 30, if not before.
AIG plans to take a charge against profits in the December quarter for the transaction. It said it would have recognized a $US2.9 billion loss had the transaction occurred a year.
