Buffett's Berkshire Hathaway Assumes AIG's Asbestos Risk

(April 24, 2011) — Warren Buffett’s Berkshire Hathaway will get  $1.65 billion from Chartis, a property and casualty unit of bailed-out insurer American International Group (AIG), for assuming its risk of asbestos policies.

The agreement reflects AIG’s aims to buy protection against asbestos-related claims, which have become increasingly high for insurers, in an effort to slash its liabilities.

AIG, which has been under state control since its near-bankruptcy in 2008, said the transaction would result in a gain before taxes of around $200 million in the second quarter. As part of the deal with the insurance giant, Berkshire Hathaway’s National Indemnity will take on as much as $3.5 billion in potential claims related to asbestos exposure.

“We believe that this transaction is beneficial for Chartis, as it will reduce the risk of future adverse development of US asbestos exposures, including the risk associated with the recoverability of related reinsurance,” Peter Hancock, the recently named chief executive of Chartis, said in a statement.

The deal follows similar ones made by Buffett, who has been attracted to the long-term nature of insurance payouts. Last year, Buffett received $2 billion in premiums to cover the asbestos liabilities of the insurer CNA Financial Corp. In February, Buffett revealed that he was on the lookout for more big-time deals after Berkshire Hathaway posted its strongest profits since the start of the financial crisis.

Risk transfer deals have also been growing in popularity among UK pensions, which are transferring risk to insurance companies, driven by M&A activity, a growing number of closures and part-closures of defined benefit pension schemes, and concerns over longevity risk. The evidence of this comes from a March report by Hymans Robertson that showed UK pension buyouts, in which an entire scheme is passed to a specialist insurer, are becoming more and more prevalent.

Another example illustrating the growing popularity of risk transfer deals is the Pension Insurance Corporation’s (PIC) February decision to reinsure $799 million of longevity risk to better manage risk and more effectively compete for new business. According to some forecasts, more than $24 billion worth of pension risks could be passed on to insurers this year. PIC has said its transactions indicate the insurer’s desire to focus on risk management and on the efficient allocation of capital.