Image source: The Motley Fool.
Stocks are little changed on Tuesday afternoon, with the benchmark S&P 500 (^GSPC 0.41%) and the Dow Jones Industrial Average (^DJI 1.13%) (DJINDICES: $INDU) down 0.29% and 0.01%, respectively at 1:15 p.m. EDT. Shares of Berkshire Hathaway Inc. are outperforming (only just), up 0.01%, even as Warren Buffett's conglomerate announces the acquisition of Medical Liability Mutual Insurer Inc.
For his latest multibillion-dollar deal, Warren Buffett goes back to the well
It may not be an "elephant" -- Warren Buffett's term for a large acquisition -- by Berkshire Hathaway's standards, but Medical Liability Mutual Insurer Inc. (MLMIC) is the largest medical liability insurer in the state of New York, with earned premiums of $450 in 2015 and policyholders' surplus of $1.8 billion at the end of the year.
Policyholder's surplus is the equivalent of shareholders' equity -- as a mutual insurance company, MLMIC is owned by its policyholders.
An analyst note published by investment bank Keefe, Buyette & Woods (KBW) yesterday estimates the deal value at some $2.7 billion (that's 1.48 times policyholders' surplus -- a reasonable multiple).
Buffett sounds delighted in the statement announcing the transaction, proclaiming: "MLMIC is a gem of a company that has protected New York's physicians, mid-level providers, hospitals and dentists like no other for over 40 years. Good things are worth waiting for."
(Buffett is known for his patience: Berkshire Hathaway completed its acquisition of insurer GEICO in 1996 -- 45 years after his first purchase of GEICO shares as a student at Columbia Business School.)
And well he should be: Berkshire Hathaway is already the largest healthcare liability insurer in the U.S. through its subsidiary MedPro Group (acquired in 2005 from General Electric for $825 million). The addition of MLMIC will bolster its leadership position in a relatively fragmented market: KBW estimates the deal will lift Berkshire's market share to 15%, or twice that of its closest competitor.
Furthermore, as MLMIC converts from a mutual company to a stockholder-owned business, there may be an opportunity for it to raise its level of profitability. As Buffett wrote in an excellent primer on this insurance business contained in his 2004 Chairman's Letter to Berkshire Hathaway shareholders (emphasis added):
Insurers have generally earned poor returns for a simple reason: They sell a commodity-like product. Policy forms are standard, and the product is available from many suppliers, some of whom are mutual companies ("owned" by policyholders rather than stockholders) with profit goals that are limited.
Furthermore, in a specialty insurance business such as healthcare liability, there may some opportunity for Berkshire to differentiate itself intelligently. Competing purely on price is a loser's game in insurance -- if you underprice risk, even if you win the business in the short term, you'll end up losing money in the long run.
We have relatively little data on MLMIC's financial performance and condition -- I could only find four years' worth, some of which is presented in the following table:
|
Year |
Earned Premiums |
Underwriting Profit (Loss) As a % of Premiums |
|---|---|---|
|
2012 |
$562 |
(15.3%) |
|
2013 |
$541 |
(1.8%) |
|
2014 |
$515 |
12.8% |
|
2015 |
$450 |
13.6% |
Data source: Company annual reports.
The underwriting results, both in terms of revenues and profitability, look a bit erratic, but this is most likely because of the cyclical and volatile nature of the insurance business.
In summary, while it may not be the elephant Buffet is constantly hunting for, MLMIC looks like a tidy bolt-on acquisition that will help secure Berkshire Hathaway's position in a niche insurance activity. Every little bit helps!
