AIG to pay Berkshire $9.8bn in insurance transfer deal

American International Group agreed to pay $9.8bn to Warren Buffett’s Berkshire Hathaway to take on long-term risks from commercial policies written in prior years.The reinsurance deal transfers liabilities on certain US policies from 2015 and earlier, representing reserves of about $34bn as of January 1, 2016, New York-based AIG said in a statement last week. The coverage involves so-called long-tail policies, in which claims can emerge years after a policy is issued.AIG has struggled with worse-than-expected losses on workers’ compensation policies, commercial-vehicle coverage and insurance that protects companies or their executives against lawsuits. Third-quarter results were hurt by surprise expenses on contracts in which the insurer guarantees payments to accident victims. And a year ago the company reported more than $3bn in costs to fill a reserve shortfall. AIG said on Friday that it expects to report a “material” fourth-quarter charge tied to claims costs.“The volatility of earnings for AIG has been a big problem, and they keep having unfavourable reserve development, and this basically gets rid of that issue,” Paul Newsome, an analyst with Sandler O’Neill & Partners, said in a phone interview. “The volatility is a bigger issue for AIG than it is for Berkshire,” which has a higher credit rating and had more than $80bn in cash as of September 30.AIG will take on the first $25bn of losses on the policies covered in the deal. Then, Berkshire’s National Indemnity will take on 80% of additional losses, up to a maximum of $20bn, according to the statement. AIG will maintain control of claims handling, keeping relationships with clients.Buffett and reinsurance lieutenant Ajit Jain have helped build Berkshire by taking on risks initiated by rivals. The deals bring premium revenue and also reserves that Buffett can invest in stocks or takeovers. Berkshire agreed this month to assume asbestos liabilities from Hartford Financial Services Group and struck a similar deal with AIG in 2011.AIG chief executive officer Peter Hancock has been selling units and pursuing risk-transfer deals to free up capital for share buybacks and reduce volatility from contracts that the insurer entered in prior years. Last January, he announced plans to return $25bn to shareholders over two years and appointed Charlie Shamieh to lead a so-called legacy unit for businesses that AIG plans to sell or wind down.“This decisive step enables us to focus firmly on the future,” Hancock said in the statement announcing the deal with Buffett. “The agreement supports our stated strategy and gives us additional risk capacity to serve our clients and return capital to shareholders.”AIG announced last year that hedge fund billionaire John Paulson and a representative from Carl Icahn’s firm would be joining the insurer’s board after the activists pushed the company to divest assets to improve return on equity. AIG has struck deals to sell a US mortgage insurer, a broker-dealer unit and a Lloyd’s of London business. The company also announced transactions to exit a life insurance operation in Japan and commercial and consumer units in nations including Argentina and Turkey. Hancock’s company didn’t quantify the financial impact tied to the Berkshire deal. Had the agreement been entered at the beginning of last year, the figure would have been about $2.9bn, according to the statement.AIG has used other reinsurance deals, last year agreeing to transfer risks tied to casualty policies to Swiss Re. Shamieh, who previously oversaw life, health and disability operations, said at an investor presentation in November that he has a simple message for staff who joined his new team from other divisions to help exit some lines in which AIG was no longer issuing new policies. “Let’s make AIG Legacy small again,” he said, stressing the importance of transferring obligations to counterparties that his company can trust. “Let’s keep the promises we made to our policyholders and insureds and put that at the forefront of everything we do.”The payment to Omaha, Nebraska-based Berkshire is due by June 30, along with interest, meaning the final figure could exceed $10bn. The sum represents almost 3% of AIG’s investment portfolio, which was more than $300bn as of September 30.