Berkshire’s $10 Billion Deal wth AIG Attractive Because It’s Risky: Munger

By and | May 8, 2017

Charles Munger, the vice chairman of Warren Buffett’s Berkshire Hathaway Inc., said the decision to take on insurance liabilities from American International Group Inc. offers plenty of risk, and also the chance for a substantial reward.

“It’s intrinsically a dangerous kind of activity, but that’s one of its attractions,” Munger said Saturday at Omaha, Nebraska-based Berkshire’s annual meeting, highlighting the judgment of Buffett and his reinsurance deputy, Ajit Jain. “Get me in a lot more of those businesses and I’ll accept a little extra worry.”

AIG agreed in January to pay $10.2 billion to Berkshire to help shoulder the risk of additional losses on policies that already burned the New York-based company with higher-than-expected claims costs. Buffett said he was happy to gather more money that can be used for takeovers and stock picks. Right now, the funds from AIG are earning “peanuts” for Berkshire, but there is potential for better returns, he said.

“We’ll do well by getting $10.2 billion today, with a maximum payout of $20 billion” between “now and Judgment Day,” Buffett said. “The question is how fast we pay out the money.”

Credit Suisse Group AG analysts highlighted the risks in January when they said the deal could jeopardize profits at Berkshire’s property-casualty operations. AIG has repeatedly underestimated potential losses on policies like workers’ compensation and environmental coverage, where losses can emerge years after contracts are written. Still, the analysts said that based on Buffett’s investing record and a review of prior reinsurance transactions, the “total projected benefit” is about $8 billion.

‘Clearly Wrong’

Berkshire also agreed in January to assume asbestos liabilities from Hartford Financial Services Group Inc. and struck a similar deal with AIG in 2011. The recent AIG deal tops Berkshire’s $7 billion reinsurance transaction in 2006 with former investors in Lloyd’s of London. Some of the assumptions for payouts on prior reinsurance contracts were “clearly wrong,” Buffett said Saturday.

For the recent AIG transaction, “We know whatever our projection is, that it will be wrong, but we try to be conservative,” he said. “Overall we’ve done OK on this.”

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