American International Group Inc. and certain of its subsidiaries entered into a binding term sheet for an adverse development reinsurance agreement with Berkshire Hathaway Inc. subsidiary National Indemnity Co.
Under the agreement, AIG will cede 80% of reserve risk on substantially all of its U.S. commercial long-tail exposures for accident years 2015 and prior. The effective date of the agreement is Jan. 1, 2016.
National Indemnity will assume 80% of the net losses and net allocated loss adjustment expenses on the subject reserves in excess of the first $25 billion. Its overall limit of liability under the agreement is $20 billion.
AIG will pay a consideration of $9.8 billion by June 30 plus interest at the rate of 4% per annum from Jan. 1, 2016, to payment date. The amount will be placed into a collateral trust account as security for National Indemnity's claim payment obligations to the AIG operating subsidiaries. Berkshire Hathaway will provide a parental guarantee to secure the obligations of National Indemnity under the agreement.
AIG will retain the sole authority to handle and resolve claims.
AIG expects a material prior-year reserve development charge in the fourth quarter of 2016, which will be included in the year-end financial results. The agreement will be accounted as a retroactive reinsurance agreement in the first quarter of 2017. AIG will recognize a loss or a deferred gain at inception of the agreement to the difference between consideration paid and the ceded reserves as of Dec. 31, 2016.
The closing of the transaction is subject to receipt of required regulatory approvals, execution of transaction documentation and other conditions.
The AIG's operating subsidiaries that will be indemnified against losses include AIG Assurance Co., AIG Property Casualty Co., AIG Specialty Insurance Co., AIU Insurance Co., American Home Assurance Co., Commerce & Industry Insurance Co., Granite State Insurance Co., Illinois National Insurance Co., Lexington Insurance Co., National Union Fire Insurance Co. of Pittsburgh Pa., New Hampshire Insurance Co. and Insurance Co. of the State of Pennsylvania.