As a means of risk management, AIG will pay Berkshire Hathaway about $10 billion to take on a number of long-term risks on commercial insurance policies.

As is standard in reinsurance deals, Berkshire Hathaway, the US conglomerate headed by Warren Buffet, will pay a share of claims incurred by AIG. In return, AIG will pay Berkshire Hathaway a reinsurance premium. The deal will extend to “long-tail” exposures – liabilities that arise long after the policies were issued, specifically on certain casualty, workers’ compensation and other commercial policies.

AIG Chief Executive Peter Hancock believes the reinsurance deal will help lower risk and free up capital for share buybacks. “This decisive step enables us to focus firmly on the future”, Hancock said, with “additional risk capacity to serve our clients and return capital to shareholders.” AIG will retain authority to handle and resolve claims, enabling it to maintain client relationships.

One of America’s largest insurers, AIG has struggled with unexpected losses from commercial policies in recent years. Since its federal bailout in 2008, the firm has reduced exposures and shed businesses, including a US mortgage insurer, a broker-dealer unit, and a Lloyd's of London business.

Insurance industry analysts are weighing in on AIG’s motivation, and possible outcomes of the deal. Jay Gelb and Brian Meredith, of Barclays Capital and UBS respectively, said it may signal lingering problems in AIG’s portfolio. Paul Newsome, an analyst with investment firm Sandler O'Neill & Partners, said “The volatility of earnings for AIG has been a big problem, and they keep having unfavourable reserve development, and this basically gets rid of that issue.”

The transaction will amplify Berkshire Hathaway’s investing power, including stocks and whole companies. As Reuters reports, its National Indemnity unit, led by reinsurance chief Ajit Jain, will take on 80% of net losses in excess of the first $25 billion, with a maximum liability of $20 billion.

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