Berkshire's Deal With AIG Will Boost Premiums and Float

In a positive bit of news for wide-moat-rated

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.

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