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I think it was quite a good transaction from AIG’s standpoint. Because they did take 20 billion of potential losses off for 10.2 billion.
I mean, when somebody hands you $10.2 billion and says, “I’m counting on you to pay 20 billion back, even if it’s 50 years from now, on the last dollar,” there are very few people that they’d want to hand 10.2 billion to. And there’s limited people on the other side.
American International Group, Inc. (NYSE: AIG) today announced that it has entered into a binding term sheet for an adverse development reinsurance agreement, effective January 1, 2016, with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. The agreement covers 80% of substantially all of AIG’s U.S. Commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG’s U.S. casualty exposures during that period. AIG will retain sole authority to handle and resolve claims, and NICO has various access, association and consultation rights.
The consideration for this agreement is $9.8 billion payable in full by June 30, 2017, with interest at 4% per annum from January 1, 2016 to date of payment. The consideration paid to NICO will be placed into a collateral trust account as security for NICO’s claim payment obligations to the AIG operating subsidiaries, and Berkshire Hathaway will provide a parental guarantee to secure the obligations of NICO under the agreement.
NICO is assuming 80% 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. This provides material protection to policyholders against adverse developments beyond current reserve levels.