Berkshire's Deal With AIG Will Boost Premiums and Float
We're leaving our fair value estimate unchanged, but see this as a positive piece of news for the wide-moat firm.
In a positive bit of news for wide-moat-rated Berkshire Hathaway's (BRK.B) reinsurance operations, which continue to be negatively affected by a reinsurance market that has too much capacity (with pricing inadequate for the risks being assumed), the firm announced a major deal with AIG to assume the risks associated with certain U.S. commercial policies written by the latter firm prior to 2016. The $9.8 billion consideration for this agreement is payable in full by the end of June 2017, with AIG agreeing to pay interest (at a 4% annual rate) on any unpaid balance between the start of January 2017 and the actual payment date. The deal covers 80% of AIG's U.S. commercial long-tail exposures--primarily U.S. casualty exposures (likely tied to workers' compensation and environmental claims)--underwritten prior to 2016.
We think this is a good bit of business for Berkshire, which has relied on Ajit Jain's expertise in risk assessment and underwriting for the past three decades to generate reinsurance deals that are priced appropriately for the level of risk that the firm is undertaking. In this instance, Berkshire will be covering 80% of the losses in excess of $25 billion for AIG’s long-tail commercial exposures, with Berkshire's overall liability under the agreement limited to $20 billion. While the premiums associated with this contract will be earned over time (potentially lifting our forecast earned premium growth over the next five years), Berkshire will have the float associated with the deal available to invest as soon as it receives the payment from AIG.
With interest rates expected to continue to rise, this could be a timely transaction for Berkshire. For the time being, though, we're leaving our fair value estimate for the firm in place but will adjust it in the near term if we feel that this deal (or other potential developments like corporate tax reform) affect our valuation in a material way.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.