Berkshire Takes AIG Asbestos Risk in $1.65 Billion Deal

Berkshire Hathaway Inc. CEO Warren Buffett
Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett. Photographer: Prashanth Vishwanathan/Bloomberg

Warren Buffett’s Berkshire Hathaway Inc. will get $1.65 billion from American International Group Inc. for assuming the risk of asbestos policies from the bailed-out insurer.

The deal with Omaha, Nebraska-based Berkshire’s National Indemnity will result in a deferred pretax gain of $200 million this quarter, AIG said today in a statement.

Buffett, who oversees the largest reinsurer in the U.S., has assumed risks from XL Group Plc and CNA Financial Corp. as carriers have moved to simplify or limit liabilities. The deals give Buffett, 80, funds to invest and the chance to profit if claims are less than projected by underwriters.

“His acumen of investment performance is better than what AIG could do,” said Paul Howard, director of research at Solstice Investment Research. “I think AIG loves to do it so they can go to their regulators or the rating agencies and say, ‘Look how much liability we took off our books.’”

AIG, the worst performing stock in the Standard & Poor’s 500 Index this year, climbed 23 cents to $32.35 at 4:15 p.m. in New York Stock Exchange composite trading. The taxpayer-owned company is simplifying its liabilities as it prepares to replace government capital with private investment. Berkshire advanced 1.4 percent to $122,472.

Buffett buys stocks and bonds and earns investment returns with the accumulated premium, or float, collected by Berkshire’s reinsurance units. National Indemnity agreed in July to assume liabilities tied to asbestos and pollution claims from Chicago-based CNA in exchange for a $2 billion fee.

Reducing Risk

Berkshire’s limit of liability on the Chartis deal is $3.5 billion, New York-based AIG said in a regulatory filing. Buffett’s firm will assume responsibility for claims handling. The transaction doesn’t cover asbestos accounts that AIG said it believes have already been reserved to the limit of liability.

The deal “will reduce the risk of future adverse development of U.S. asbestos exposures,” Chartis Chief Executive Officer Peter Hancock said in the statement. Hancock was named CEO last month after the insurer was forced to boost reserves by more than $4 billion because it underestimated claims costs from policies sold in prior years.

Buffett, Berkshire’s chief executive officer and head of investments, told investors in his annual letter in February that the company’s insurance float was $65.8 billion at the end of the year. That compares with $27.9 billion in 2000 and $1.63 billion in 1990, Buffett said.

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