AIG strikes risk mitigation deal with Berkshire Hathaway

The stock of global insurer American International Group Inc. (NYSE: AIG) hit a high of $67.47 in the second week of January 2017.

It can be remembered that the Federal Reserve Bank of New York bailed-out the company with a loan of about $85 billion, after the near-collapse of the company in 2008. Since then AIG has sold more than 50 of its core assets and generated about $90 billion.

This is one of the prime reasons for the stock to appreciate by about 20% in the past one year.

The company is expected to report its fourth-quarter results on 14th of February. In the meantime, we believe that the stock would appreciate further due to the reasons mentioned below.

AIG

On Monday, the New York-based property and casualty insurance company announced that it has entered into a risk mitigation agreement with Berkshire Hathaway, a firm owned by the legendary investor Warren Buffett. Under the agreement, Berkshire Hathaway would bear the long-term risks associated with US commercial policies written by AIG. Berkshire would bear up to 80% of the losses exceeding the first $25 billion. The maximum amount of loss covered by Berkshire under this agreement is $20 billion.

In return, AIG has agreed to pay $10.2 billion, by June 30th , to Berkshire. The agreed amount includes the interest payable since January 1, 2016 for the service provided. Analysts consider the move as positive for the insurance company, considering the reduction in risk. This can be clearly understood by the fact that AIG currently has $32.28 billion worth liabilities. This is partially offset by the company’s cash reserves of $13.24 billion.

The company’s financial leverage was only 20% during the third-quarter of fiscal 2016. Furthermore, during the first nine months of 2016, AIG reduced its exposure to hedge fund portfolio by about $2.7 billion. This freed up nearly $800 million of its capital in life subsidiaries. Thus, considering the proactive measures taken by the firm, we anticipate the stock to remain bullish.

Technically, strong support exists for the stock at 65.30. The stochastic oscillator, with a reading of zero, indicates the possibility of a dead cat bounce. Thus, we can expect buyers support to come in soon and push the stock price higher.

To benefit from the forecasted uptrend in the stock of AIG, a trader should bet with a call option contract. The contract should remain active for at least one week from the time of purchase. The speculative trade should be taken only when the share of AIG trades below $66 in the equity market.

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