Berkshire gobbles up AIG’s asbestos reserves

Shouldn’t have been surprised by this one. Bloomberg with the call, via Business Week:

April 20 (Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. will get $1.65 billion from American International Group Inc. for assuming the risk of asbestos policies from the bailed- out insurer.

The deal with Omaha, Nebraska-based Berkshire’s National Indemnity will result in a deferred pretax gain of $200 million this quarter, AIG said today in a statement.

Warren takes on $4.45B of gross asbestos losses to go with the billions he’s already holding from CNA and Lloyd’s and XL and, hell, probably somebody’s grandma. (If he corners the market, will Justice file an antitrust action?)

In addition to the cash, he also gets the benefit of $2.8B in reinsurance protections that AIG had in place. Berkshire is responsible for losses stemming from uncollectible reinsurance. In all, the limit on this retroactive policy is $3.5B.

Meanwhile, AIG will book $200M profit. (Bloomberg makes it sound like the profit is booked this quarter, but accounting rules force it to be spread across a couple of years.) So it sounds like those asbestos reserves were sitting on AIG’s balance sheet for $1.85B net and $4.65B gross, though there might be some discounting action I’m missing.

At year-end, AIG carried gross asbestos losses of $5.53B and net of $2.2B. So AIG will still carry some asbestos reserves – maybe $880M gross and $375M net. Business Insurance notes the remaining asbestos reserves are booked at policy limits, so they can’t hurt AIG any more than they already have.

And unless everyone is being obtuse, AIG will still have about $127B in net environmental claims.

Wall Street Journal and others note this is part of a big last-minute cleanup before the federal government begins to sell its stake in AIG.

And that’s what makes the asbestos dump not-so-much of a surprise. When investors sink their money into a firm, they want it to go toward making tomorrow profitable. They don’t want it to pay for yesterday’s problems.

And with AIG’s recent bout with under-reserving ($4B+ last year), the popular press was reporting a bit of nervousness among investors.

Wednesday’s announcement is here. AIG’s 10K is here, with all the dirt around page 108. I bored you with this stuff before here.

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2 thoughts on “Berkshire gobbles up AIG’s asbestos reserves

  1. DW says:

    It was before my time, but was AIG was the colossus it later became when the asbestosis crisis hit?

    It would be interesting to know the history of the reserves, whether they were taken on by AIG via acquisition, and so always more or less fully reserved, or to what degree they were ‘organic’ claims reserves.

  2. Elena says:

    Very interesting article. Did you know that the dangers of asbestos have been known about in the United States since the Industrial Revolution first arrived on our shores in the 1800s? It didn’t seem to matter much- countless industries used it and far too many people paid the ultimate price. Here’s a great link to information about asbestos and the three asbestos diseases: mesothelioma, asbestos lung cancer and asbestosis:

    http://www.weitzlux.com/Mesothelioma_1962540.html

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