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AIG deal could jeopardize Berkshire Hathaway underwriting results: Analysts

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Berkshire Hathaway

Berkshire Hathaway Inc.’s agreement to reinsure up to $20 billion of American International Inc.’s long-tail liabilities is big enough to risk the underwriting profitability of Berkshire Hathaway’s property/casualty insurance business, analysts at Credit Suisse Securities (USA) L.L.C. said in a note Monday.

Berkshire Hathaway has written several retroactive reinsurance deals covering long-tail liabilities over the past 20 years, including another deal with AIG in 2011. However, the Credit Suisse analysts said, “What’s interesting to us is that this deal is the first deal in (Berkshire Hathaway) large enough to potentially jeopardize an underwriting profit in Berkshire’s (property/casualty) operations.”

In the deal announced last Friday, AIG will pay Berkshire Hathaway’s subsidiary National Indemnity Co. $9.8 billion to reinsure much of its pre-2015 long-tail commercial liability exposures. The deal covers 80% of AIG’s U.S. commercial long-tail net losses and loss adjustment exposures above $25 billion. The limit on the reinsurance coverage is $20 billion.

Berkshire Hathaway will have the opportunity to generate investment income on the payment while claims are paid out over several years, but the insurer and reinsurer also “prefers to make money underwriting,” Credit Suisse said. Since 2010, Berkshire Hathaway’s underwriting profit has averaged $1.9 billion, according to the note.

The Credit Suisse analysts added: “even though the risk reward of this deal looks similar to past deals in that Berkshire stands to lose very little in the worst-case scenario … we are less certain that Berkshire would want this deal to generate material adverse underwriting results.”

Retroactive reinsurance deals allow insurers to reduce pressure on earnings and free up capital to write other business, among other things.