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AIG Passes Asbestos Obligations to Berkshire Hathaway Unit

Source: WSJ - Erik Holm

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Posted on 20 Apr 2011

American International Group Inc. (AIG) is passing on $3.5 billion of Chartis' legacy asbestos liabilities to Berkshire Hathaway Inc. unit, National Indemnity Co.

Berkshire will receive from AIG about $1.65 billion to shoulder the bulk of the U.S. asbestos obligations from its Chartis unit, the company said in a statement Wednesday. The deal gives Mr. Buffett added funds to invest in the years before AIG's claims come due.

Coverage of asbestos claims has been excluded from AIG policies for more than two decades, but the company had to take a charge of about $1.3 billion in last year's fourth quarter after determining it hadn't set aside enough for claims that may still come due on the old policies.

The fourth-quarter charge, and other charges related to potential excess casualty and workers' compensation claims, fanned concern among investors who were considering whether to participate in the company's upcoming "re-IPO." That share sale will allow the U.S. Treasury to sell off the first chunk of its AIG stake. Treasury currently holds more than 90% of the insurer's common stock.

By passing its asbestos obligations to Berkshire, AIG can allay investor concern about further reserve charges in its asbestos book.

The reinsurance deal mirrors previous transactions Berkshire has struck with other insurers with lingering asbestos liabilities. In 2006, Berkshire collected $7.1 billion in cash and securities from Equitas, a company formed by underwriters at Lloyd's of London, for agreeing to pay up to $13.9 billion in asbestos and environmental claims and expenses. And last summer, Berkshire got $2 billion from CNA Financial Corp. in a similar arrangement.

Such deals give Mr. Buffett and Berkshire money to invest up front in exchange for shouldering the obligations that could take a decade or more to fully resolve themselves. Berkshire had about $66 billion in funds from insurance to invest at year-end 2010.

As long as the insurance is profitable, any money made by Mr. Buffett on the investments belongs entirely to Berkshire. Mr. Buffett has described this as investing using other people's money without having to pay interest on the borrowed funds.

The AIG deal, like the others Berkshire has struck, isn't without risk. Berkshire will be on the hook for up to $3.5 billion in insurance payouts for AIG's asbestos obligations. But if the limit is hit, it may not be for years, by which time Berkshire could have multiplied the money it collected.

The deals are termed "retroactive reinsurance" because such policies covers losses that have already occurred but whose final costs aren't yet known. Many of the deals have been struck by Mr. Buffett's insurance lieutenant, Ajit Jain.

In discussing the Equitas deal in 2007, Mr. Buffett told shareholders there was no guarantee it would earn Berkshire money in the long term. But, he wrote, "Ajit and I think the odds are in our favor. And should we be wrong, Berkshire can handle it."


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