Jay Gelb, the insurance expert on the analyst panel wants to know about Berkshire Hathaway's latest deal with American International Group Inc., which transfers the responsibility to pay some of AIG's future claims on old policies.
AIG is paying roughly $10 billion for Berkshire to take responsibility for some AIG insurance claims if they run unexpectedly high, one of the largest-ever pacts of its kind. Mr. Buffett and Mr. Munger boast that Berkshire is the only company in the world who can shoulder these sorts of transactions. It's done other big ones with Lloyd's of London and other insurers.
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Mr. Gelb wants to know how Mr. Buffett knows this is a good deal.
Mr. Buffett acknowledges the risks. Berkshire has been "clearly wrong" on one such deal that involved about $1 billion in premiums. There are a "couple of others" that may or may not work out for Berkshire because they aren't coming out as well as expected.
The AIG reinsurance agreement, which covers past losses whose final costs aren't yet known, applies to $34 billion in AIG's U.S. liability-insurance reserves. Berkshire will be able to invest the $10 billion until it is needed to pay claims. This is the float we mentioned earlier.
Right now, Mr. Buffett says, Berkshire is having a hard time finding places to put such funds.
They are "earning us peanuts," he said. That's not what "fits into the formula for making this an attractive deal."
Berkshire revealed Friday afternoon that it now holds more than $90 billion in cash and Treasurys.
Click here to see the full live coverage of Warren Buffett at Berkshire Hathaway's annual meeting:
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(END) Dow Jones Newswires
May 06, 2017 11:31 ET (15:31 GMT)