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AIG clears the decks for a sale of shares

April 21, 2011, 12:44 AM UTC

AIG is rumored to be on the verge of selling a large block of its shares, but neither the company nor the U.S. Treasury—which owns 92% of AIG’s stock—has cared to confirm that an offering is on its way.

But implicit confirmation came this morning when Chartis, AIG’s huge property and casualty company, announced that it had made a large reinsurance deal to transfer the bulk of its asbestos liabilities to National Indemnity Co. (NICO), a subsidiary of Berkshire Hathaway.

The point is that asbestos liabilities would potentially be a huge drag on an offering of shares. What investor—except, it appears, a large sophisticated insurer like NICO—would care to buy into the risk of huge asbestos claims coming along that exceed those already reserved for?

So Chartis has now cleared its asbestos decks by whisking the responsibility for paying claims to NICO—at least to a point. NICO will shoulder these up to a maximum of $3.5 billion.

In return AIG (AIG) is slated to pay NICO approximately $1.65 billion in cash when this deal closes (after various kinds of regulatory approvals). The money will go into Berkshire’s coffers to be combined with all the other cash there, including the $5 billion that Goldman Sachs (GS) just repaid Berkshire (BRKA).

Reinsurance of asbestos liabilities is familiar ground to Berkshire. In 2010, as a major example, the company reinsured asbestos and environmental pollution liability of insurer Continental Casualty (a CNA subsidiary) up to a limit of $4 billion.

The new Chartis transaction is described in the company’s press release as part of its “ongoing strategy to de-risk”—a favorite word in the financial world these days.

But certainly other world-class risks remain in the AIG empire, most especially the derivatives still held by the operation that got the company into wicked trouble in 2008, AIG Financial Products. That unit has worked hard and effectively to reduce the number of contracts it holds, but at yearend 2010 those still on the books—some of them molasses-like—had a notional value of about $350 billion.

It will be interesting to see how an offering prospectus describes those risks—and just how the investing public steps up to taking them on.

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