Competing with Warren Buffett is a nightmare. His Berkshire Hathaway boasts more capital than any other insurance or reinsurance player can come close to matching. For years his reinsurance head Ajit Jain has patiently waited for market dislocations and then brought the full force of Berkshire’s capital and financial strength to bear, whether it is aggressively piling on cat business following Hurricane Katrina, removing lingering concerns over Lloyd’s by reinsuring Equitas in the biggest-ever reinsurance deal, agreeing a 20% quota share with Swiss Re when it hit trouble or getting into the bond insurance business after that market collapsed.
This year Berkshire is taking it up a notch. Following the January 1 2013 reinsurance renewals, executives told me they noticed Berkshire being much more active. This was especially visible in Asia but Berkshire’s presence was also more keenly felt in Europe than previously, with the firm aggressively offering quota shares. Rivals noted that it seemed Berkshire was going through a transition into a more conventional reinsurer. A shift, perhaps, from being opportunistic to omnipotent.
But it was still a surprise when Aon in March unveiled a deal for Berkshire to take 7.5% of its Lloyd’s-related business. The facility is globally available across all industry segments.
Aon certainly sounded chuffed. Steve McGill, group president of Aon PLC and chairman and CEO of Aon Risk Solutions, commented: "We are constantly looking for ways to empower results for our clients and this landmark solution provides a unique way for them to access high-quality capacity efficiently. No other firm has been able to deliver a solution of this scale to their retail clients across all industry segments on a full follow basis. We are proud to be able to offer our clients unprecedented access to the financial strength of Berkshire Hathaway through this transaction."
But if clients are feeling empowered by the deal, Berkshire’s rivals are probably feeling less so, especially some of the smaller Lloyd’s players.
Speaking at the Advisen Casualty Insights Conference in New York on March 19, Eric Andersen, chief executive officer of Aon Risk Solutions America, explained the deal was done for a couple of reasons.
“One, the Lloyd’s team is trying very much to be creative, to bring double-A rated capital to the market to try to maintain a very significant position in the global insurance market. So trying to draw capital to their market...is a fantastic show of creativity and innovation.
“There have also been issues long term in the subscription market about the smaller players frankly and their ability to clog up claims and the strength of the syndicates and whether the customers have real deep relationships with some of the follower markets. So introducing a bigger line with a big market that the clients can use on multiple products has long-term benefits over time with that market.”
At the same conference, US casualty players expressed concern about the deal potentially bringing even more capacity into an already crowded market.
Reading some of the comments left on Reactions’ LinkedIn group certainly reveals wariness about the move. “Anytime someone has this big a stick,
The benefits of the deal for Berkshire appear obvious, with the world’s biggest broker bringing diversified book of business and servicing it. However, rivals will be rightly concerned about similar deals and whether it signals a shift to Berkshire pursuing follow-the-market types of deals rather than the selective big bets for which Jain is famed.
Berkshire’s busy 2013 so far comes after what Buffett described as a “subpar” year for his firm. Last year was the ninth time in 28 years that Berkshire’s percentage increase in book value was less than the S&P’s percentage gain. Berkshire achieved a total gain for shareholders of $24.1bn in 2012. The firm used $1.3bn of that to buy back stock, leaving a $22.8bn increase in net worth for the year.
Be in no doubt about how Buffett feels about his insurance units, however. “Our insurance operations shot the lights out last year,” he said. “While giving Berkshire $73bn of free money to invest, they also delivered a $1.6bn underwriting gain, the 10th consecutive year of profitable underwriting. This is truly having your cake and eating it too. Geico led the way, continuing to gobble up market share without sacrificing underwriting discipline.”
Berkshire’s insurance float stood at $73.1bn at the end of the year, up from $70.6bn at the end of 2011.
“Last year I told you that our float was likely to level off or even decline a bit in the future. Our insurance CEOs set out to prove me wrong and did, increasing float last year by $2.5bn. I now expect a further increase in 2013. But further gains will be tough to achieve.” This last point may explain the apparent shift in strategy.
Berkshire’s insurance and reinsurance operations made an underwriting profit of $1.6bn for the year, up from $248m in 2011. Berkshire Hathaway Reinsurance made an underwriting profit of $304m, compared with a loss of $714m in 2011. General Re made an underwriting profit of $355m, up from $144m. Geico made an underwriting profit of $680m, up from $576m. And other primary operations made an underwriting profit of $286m, up from $242m.
In the letter, Buffett praised Jain, advising: “If you meet Ajit at the annual meeting, bow deeply.” Buffett also singled out Tad Montross, chief executive officer of General Re.
Possibly in contrast to other players, one prominent reinsurer is probably feeling a bit more warmly about Buffett than before. Today, a row between Swiss Re and Berkshire Hathaway was resolved with Swiss reinsurer agreeing to take back risks in return for a $610m payment from Berkshire Hathaway. The resolution over a life retrocession agreement that concluded in January 2010 is expected to lead to an initial gain of about $100m for Swiss Re in the first quarter of 2013.
The contract limits are amended so that Berkshire Hathaway will assume total losses of up to $1.05bn compared to $1.5bn in the original agreement.