February 24, 2018 / 7:42 PM / in a year

Berkshire boosts liability estimate on AIG reinsurance contract

FILE PHOTO: American International Group Inc. (AIG) headquarters seen on the day of the company's 2017 annual shareholder meeting at 175 Water Street, New York, U.S., June 28, 2017. REUTERS/Suzanne Barlyn

(Reuters) - Berkshire Hathaway Inc (BRKa.N), the conglomerate run by billionaire Warren Buffett, on Saturday disclosed a $1.8 billion increase in estimated claim liabilities under a big reinsurance contract with American International Group Inc (AIG.N).

In its annual report, Berkshire said the increase, to $18.2 billion, was made in the fourth quarter, and was based on higher-than-expected loss payments reported by AIG.

Berkshire also boosted a related deferred charge asset by $1.7 billion, and estimated its year-end net liability under the contract was $10.7 billion.

The January 2017 contract called for Berkshire’s National Indemnity Co to take on many of the long-term risks in AIG’s property and casualty portfolio, sometimes known as “long-tail” exposure, in exchange for $10.2 billion upfront.

National Indemnity agreed to take on 80 percent of net losses in excess of the first $25 billion, with a maximum liability of $20 billion.

The contract reduced potential risks for New York-based AIG, and some analysts said soon after it was announced that the pricing terms appeared fair.

At the same time, the $10.2 billion payment boosted Berkshire’s insurance “float,” which reflects premiums received before claims are paid, and gave Buffett more money to invest.

Berkshire is based in Omaha, Nebraska.

Reporting by Jonathan Stempel in New York; editing by Diane Craft

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