American International Group partnered with Berkshire Hathaway’s National Indemnity Company on a new $9.8 billion reinsurance agreement that covers a large chunk of prior AIG’s U.S. Commercial Insurance long-tail exposures.
The deal, a retroactive adverse development reinsurance agreement effective Jan. 1, 2016, represents yet another move by AIG to reduce long-term costs in an ongoing move to become more efficient.
“This decisive step enables us to focus firmly on the future and build on the progress we’ve made,” AIG President and CEO Peter Hancock said in prepared remarks.
The arrangement covers 80 percent of the majority of AIG’s U.S. Commercial long-tail exposures for accident years 2015 and prior. This includes the biggest part of AIG’s U.S. casualty exposures during that period. AIG said it will still keep sole authority to handle and resolve claims, and National Indemnity Company (NICO) gets various access, association and consultation rights.
The deal is worth $9.8 billion, payable in full by June 30, 2017, with interest at 4 percent annually from Jan. 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 percent 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.
AIG’s fourth quarter reserve review is being finalized and the results of this review will be included in the company’s year-end financial results. AIG currently expects a material prior-year adverse development charge in the fourth quarter.
The agreement will be counted in the 2017 first quarter as a retroactive reinsurance agreement. AIG will recognize a loss or a deferred gain at inception of the agreement equal to the difference between the consideration paid and the ceded reserves as of December 31, 2016.