American International Group, Inc. (AIG) has entered into a $9.8 billion adverse development reinsurance agreement with Berkshire Hathaway subsidiary, National Indemnity Company (NICO), effective January 1st, 2016.
The $9.8 billion transaction covers 80% of substantially all of AIG’s U.S. commercial long-tail exposures for accident years 2015 and prior, and this includes the largest segment of AIG’s U.S. casualty exposures during the period.
“This decisive step enables us to focus firmly on the future and build on the progress we’ve made in transforming AIG. The agreement supports our stated strategy and gives us additional risk capacity to serve our clients and return capital to shareholders,” said Peter Hancock, AIG President and Chief Executive Officer (CEO).
The consideration is due in full by June 30th, 2017, with annual interest of 4% from January 1st, 2016 to date of payment, according to a press release on the agreement from AIG.
AIG is set to retain sole authority o handle and reserve claims, while NICO as various access, association and consultation rights.
NICO is to assume 80% of the “net loss and net allocated loss adjustment expense on the subject reserves in excess of the first $25 billion and NICO’s overall limit of liability under the agreement is $20 billion,” explains AIG.
The above “provides material protection to policyholders against adverse developments beyond current reserve levels.”
The deal is a retroactive reinsurance agreement, and as such will be accounted for in the first-quarter of 2017.
As an example of the deals workings, AIG explains that had the agreement been entered into on January 1st, 2016, AIG would have recognised a $2.9 billion loss, based on carried reserves of roughly $34 billion, net of discount at that time.
“This loss would be reduced by AIG’s expected reinsurance recoveries from NICO’s 80% share of any 2016 calendar year adverse prior year development covered by the contract,” says AIG.