Berkshire’s unusual deal with AIG
Berkshire received a 10.2 billion retroactive premium from AIG early last year. If the upwardly revised estimate of 18.2 billion of ultimate claims proves to be correct, will the cost of float, adjusted for favorable tax attributes, likely be lower or higher than what Berkshire would have paid to borrow 10 billion for a similar duration?
Well, we certainly go in with the idea that it will be… the cost will be lower. And it’s an interesting situation.
We… essentially, AIG, which is one of the largest property-casualty, particularly commercial property-casualty companies in the world, said, “We want to give you all of the losses that we incurred in a very big percentage of our domestic business before December 31st of 2015, and we will pay the first 25 billion. And then after we pay 25 billion and AIG pays $25 billion, then you pay 80 percent of the next 25 billion.” And they gave us $10 billion for doing that. And that’s…
If we are correct about our estimates of how much money will be paid and when it will be paid, we should come out being better off than if we had borrowed a similar amount.
We have a history of doing 10 or so… maybe 12… big deals like that. We hold the record. We did it for Lloyd’s of London 10 or more years ago, and we did it now with AIG.
And sometimes we’ve been on the low side in our estimate, and sometimes we’ve been on the high side so far.
AIG just said that they… I think they paid 15-and-a-fraction billion on these pre-12/31/2015 losses. They paid 15-and-a-fraction billion. But the payments tend to trickle down over years as you get further away from when the losses occurred.
So I would say that we still feel OK about it, and we’ll be wrong one way or the other.
Everybody is when you estimate losses that may not get settled for 20 or 30 years. But so far, on the group as a whole of these deals we’ve done, we’ve been OK. And I think on the AIG thing, we think we’ll be OK. And I think AIG thinks we’ll be OK. I mean, they entered into it for good reasons of their own. So it looks OK.
Sorry to get into this technical stuff, but Jonathan always asks me questions like that, so I have to be ready to… I want to answer them.
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