2023: How has the retroactive insurance deal with AIG performed?

BECKY QUICK: This question is for both Warren and Ajit. Comes from Jason Plonner (PH) in Livingston, New Jersey.

He says, “In 2016, you entered into a very unique transition with AIG where you assumed up to $20 billion of liabilities in exchange for about $10 billion upfront. Can you please provide us with an update on this transition in light of the increase in interest rates?

And then in Tokyo just a few weeks ago, you talked about the risks of banks with assets that were susceptible to rising interest rates. Any insight as to how Berkshire liabilities are susceptible to duration would be appreciated.”

WARREN BUFFETT: Is that directed to Ajit, or me, or what?

BECKY QUICK: Both.

WARREN BUFFETT: OK. Let me introduce my one thing, but Ajit is the key to this. He’s the one that put the deal together. But we got handed $10 billion, we’ll say. But we weren’t restricted to putting that into bonds. So, interest rates affect us to some degree maybe, in terms of the deal we did with AIG, or anybody we would do a similar deal with like that.

But we don’t have to put it in matching bonds or anything of the sort. It goes into a general pool of assets, which we manage, and the liquid assets now are $130 plus. But it is not set aside in some little compartment like people like to think.

Now, no other insurance company could do it. But they can’t think that way. They aren’t even used to thinking that way. But they can’t think that way because they don’t have our balance sheet. We account for 26% or something like that of the net worth of all property casualty companies in the United States.

So far, the payments that we have had to make have run modestly. And Ajit will correct me on this if I’m wrong, because he paid attention. The amount we have had to pay has run slightly below the amount we anticipated having to pay in terms of our share of the losses.

But it served AIG’s purposes. It came to us where we are in a unique position. There’s nobody else that was able to write that, just like when we took on Lloyd’s. I mean, Lloyd’s said there was no choice other than Berkshire Hathaway when they essentially resuscitated their market by laying off a lot of liabilities on Berkshire Hathaway.

So, we won’t see those deals very often. If they’re for $500 million or something like that, somebody else will go in there and offer more money. And everybody’s looking for money on Wall Street. But if they start talking with the deal like the AIG deal, there isn’t any other stop now. Correct me on all my numbers there, Ajit. (Laughter)

AJIT JAIN: No. One way to look at how the deal is performing since we did the deal is at the point in time when we did the deal, we had made certain projections of how much we will pay out each year. And what we do is monitor what the action payments are since the inception of the deal, and how does that compare with what we expected to pay out.

As Warren mentioned, these two numbers are very close to each other. More specifically, the actual payouts are 96% of what we had projected to pay out at this point in time, which is good but not great. We are still ahead of the curve. If we do end up paying out less than what we projected, not only would we have borrowed money at a very attractive rate, meaning significantly less than 4%, in addition to that we would have made a fee, which in 2015 dollars would be $1 million.

So, we would’ve borrowed money at less than 4% and we would’ve made $1 million fee, which is slightly more than what we were expecting to do. So, net/net, we’re very happy with the deal, we’re happy we did it. But the game is not over. There are tort liabilities that are coming down the pike every second day. So, I’m cautiously optimistic that the deal will work out better than how we expected it to work out.

CHARLIE MUNGER: Well, the really interesting thing is that within Berkshire, the casualty insurance companies have four times as much stockholder capital behind each dollar of premium value. Four times normal. And of course, we see the big deals. Who would you trust if you had a big liability you wanted to dump on somebody?

WARREN BUFFETT: And we have $25 billion or more coming in from things other than insurance, uncorrelated to insurance, every year with no obligations. We don’t pay dividends. If we pay dividends, you know, and you cut your dividend, try going around trying to write insurance the next day.

I mean, and it’s a business where people are counting on you to pay. And when we take that $10 billion, we don’t agree to put it in five-year bonds and ten-year bonds. We don’t even think that way. And the people that do business with us know that they have somebody like nobody else on those that’s going to be able to pay $10 billion no matter what happens to the economy.

So, it’s not only the presence of enormous strength in the insurance companies, it’s the fact we have all these earnings that essentially come in every month, we don’t have a lot of debt. I mean, we have debt at the railroad and the energy level. But in terms of the rest of the operation — And we don’t guarantee that debt, but it’s (UNINTEL).

And there just isn’t another Berkshire, and Ajit recognizes that when he’s negotiating. So does the other party if the sums are big enough. There’s all kinds of people that love to get $500 million or $300 million, and they may think in terms of lending it out because that’s what their insurance companies can do at a somewhere higher rate. But that is not a game we play, and we don’t have any interest in playing in.