The Consequences of Poaching: Berkshire Edition

Lots of headlines and news fodder stemmed from the exit of four top executives from American International Group (NYSE: AIG  ) to start a new commercial property and casualty insurance division within Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) this past April. And though most of the attention centered on AIG's ability to move forward in its recovery with so many top employees leaving, there's been little notice of a big consequence of Berkshire's move.

Background
With Berkshire's entrance into the commercial property and casualty insurance market, it's stepped on some pretty big toes: AIG's. Trying to boost its measly 1.6% market share of the U.S. excess and surplus liability market, estimated to be around $25 billion annually, Berkshire's poaching may have cramped its other operations. After 20 AIG employees left the company for Berkshire's new division, the former decided to halt any future ties with the latter's reinsurance business.

Reinsurance can be thought of as insurance for insurers. Basically, a second insurance company will be paid a fee to take on some of the liability from the first insurer. Berkshire's National Indemnity Co. and General Re operations are two of the world's largest reinsurers. In fact, based on the first half of 2013, NICO reported a net income of nearly $3 billion, which accounts for 60% of the nation's top 18 reinsurers' aggregate profits.

The AIG/BRK numbers
Based on AIG's 2012 annual report, Berkshire was its top reinsurer with $2.19 billion in coverage, including a $1.6 billion policy from 2011 on AIG's outstanding asbestos claims. Berkshire's policies represented 8.5% of AIG's total reinsurance of $25.8 billion. In terms of Berkshire's total 2012 underwriting revenue from its reinsurance businesses, the $2.19 billion would equate to 14%.

By looking at this comparison, it's clear Berkshire may come away worse for the wear. Since reinsurance is really a risk management activity for AIG, it doesn't need to enter into those policies. It also has a number of other reinsurers to choose from once removing Berkshire from its Rolodex. Though it is interesting to note that AIG's No. 2 and 3 reinsurers (based on percentage of reinsurance business) are Swiss Re and Munich Re. Both companies are partially owned by Berkshire Hathaway -- 6% and 3%, respectively. It will be interesting to see if AIG continues to do business with those firms in the future.

Looking forward
If Berkshire can really make a dent in the excess-surplus market, the impact of AIG's exit from its reinsurance business won't hurt as badly. But since the current operations will need a ramping-up period, there may be some noticeable impact in the coming year or so. For AIG, there will probably be less of an impact, though it might find better pricing from Berkshire's competitors. Either way, both companies offer plenty of opportunities for investors, and the whole saga shouldn't bring either firm many headaches in the long term.

Smart moves
Though his decision to poach executives from one of the most formidable insurance firms in the U.S. may have some temporary side effects, Warren Buffett is one of the most revered businessmen in the world. Likewise, his investment knowledge is unrivaled. He has made billions through his investing, and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


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  • Report this Comment On September 28, 2013, at 5:51 PM, thenoffya wrote:

    I agree, Berkshire may lose some reinsurance business from AIG. But I think it's pretty obvious the real loser here would be AIG. Why? Because BRK is THE BEST reinsurance company around, with the best financial strength. Insurance is only as good as the company insuring you, and while I am not saying that any particular insurance company will go out of business, I think it is fair to say that BRK would be the reinsurer that is furthest away from going out of business.

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