BHSI offering stability to risk managers in volatile market

As many international corporate and commercial insurers struggle to find a way to make a decent return and deliver growth, Berkshire Hathaway Specialty Insurance seems to be able to buck the trend and continue to surge forward without making acquisitions. Adrian Ladbury asks: how and why is this possible? The continued process of consolidation and mergers and acquisitions [M&A] in the international insurance and reinsurance market is forcing risk managers to take a closer look at where they place their coverage. The more stable and highly capitalised insurers, which are less likely to be targets of takeovers, are benefiting from this trend, according to Berkshire Hathaway Specialty Insurance [BHSI]. Last year saw M&A activity in the insurance market valued at more than $150bn. While the pace has slowed this year, the process has continued with big deals such as Sompo’s $6.3bn acquisition of Endurance. Chinese conglomerate Fosun is seeking a buyer for Ironshore, the specialty insurer it acquired for $1.8bn only last year. Liberty Mutual is reportedly the most recent frontrunner for this deal, after it missed out last year. At the same time, many of the big listed international carriers such as AIG, Zurich, AXA and Generali have announced serious strategic reviews, as new leadership teams work out how to cope with the stubbornly soft underwriting conditions and challenges posed by rapidly altered business models and technological innovation. Corporate risk managers do not like uncertainty and will naturally seek ways to cut out the negative impact such change may have on their programmes. This presents the hugely capitalised and extremely secure Berkshire Hathaway with a big opportunity, according to David Bresnahan, executive vice-president of the group’s primary specialty insurance arm BHSI, which was launched three and a half years ago by former AIG executive Peter Eastwood. Most of the leading international insurance carriers are struggling to maintain meaningful volume growth in the current market. Prices are simply not high enough to justify continued growth in many core lines and territories. Therefore, attention is shifting to cost control in order to maintain margins. ‘Underwriting for profit’ and ‘walk away prices’ are the common phrases emanating from the mouths of insurer CEOs during recent quarterly analyst conference calls. This environment, however, provides BHSI with a big opportunity, Mr Bresnahan recently told AM Best TV during an interview at the annual National Association of Professional Surplus Lines Offices conference. “Given the competitiveness of the market, we are really pleased with [our] progress,” he said. Mr Bresnahan explained that changes on the carrier side from M&A and subsequent frequent movement of key individuals and teams, means that he and his colleagues at BHSI are seeing a change in buyer behaviour. He said risk managers are asking themselves whether the underwriters they normally deal with will actually be around next year or whether their company may even be acquired, leading to great uncertainty. Because of Berkshire Hathaway’s huge financial backing as part of Warren Buffett’s group of companies, BHSI is able to “trade on that”, said Mr Bresnahan. The numbers appear to back up his claim. Mr Eastwood and a team of three colleagues only launched BHSI in 2013. It has grown rapidly and now has 1,250 staff, based in 23 offices in nine countries. The insurer this year broke into AM Best’s annual ranking of the top 10 biggest excess and surplus lines insurers. Mr Bresnahan said that this year the operation should hit between $1.35bn and $1.4bn in premium volume, from a start of zero when launched. This growth has been accompanied by profitability at a level rival insurers are struggling to deliver, he added. BHSI’s combined ratio remains in the “low to mid-80s”, he told AM Best. Standalone figures for BHSI are not available. But by digging through the group’s quarterly filings one can find further evidence to support this story of rare profitable growth in a tough market. The group divides its insurance business up into three core segments. These are General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group [BH Primary]. BHSI sits within the third group. This group also includes: MedPro Group, a provider of healthcare malpractice insurance coverages National Indemnity Company’s primary group, underwriters of commercial motor vehicle and general liability coverages US Investment Corporation, which underwrites specialty insurance coverages Berkshire Hathaway Homestate Companies, providers of commercial multi-line and workers’ compensation insurance Applied Underwriters, a provider of integrated workers’ compensation solutions Berkshire Hathaway GUARD Insurance Companies, providers of workers’ compensation and commercial property and casualty insurance coverage to small and mid-sized businesses Central States Indemnity Company, a provider of credit and Medicare Supplement insurance. The group revealed that premiums earned by Berkshire Hathaway Primary in the first nine months of 2016 were $4.58bn, an increase of 16% compared to 2015. “The increase in premiums was primarily attributable to volume increases from BH Specialty, MedPro Group, BHHC and GUARD,” stated the group. Combined loss ratios were 61% in the first nine months of 2016, and 59% in 2015. “The comparative increase in the loss ratio reflected comparative declines in favourable loss development of prior years’ loss events, partly offset by lower loss ratios on current year business,” stated the filing. Berkshire Hathaway is certainly not the only insurance and reinsurance group to report reduced reserve releases or even additions in recent times, so this is no big problem. Overall, it appears that the vast majority of the group’s rivals would readily welcome such numbers, particularly as they come without the cost and effort caused by acquisitions or disposals and, particularly in the case of BHSI, from organic growth. Mr Buffett made it very clear in his last annual letter to shareholders that he sees no need to join in the current M&A frenzy. He assured investors that it is “almost certain” that the group will not acquire a large commercial insurer as it continues to expand the BHSI business. That growth will be based on the marketing power provided by the massive financial resources of the group, the addition of experts to expand into target specialty markets and the ability to deliver genuine bespoke insurance and reinsurance solutions for difficult-to-place risks and programmes. The latest quarterly statement stressed the power of BHSI’s financial strength. It stated: “A key marketing strategy of our insurance businesses is the maintenance of extraordinary capital strength. A measure of capital strength is combined shareholders’ equity determined pursuant to US statutory accounting rules [‘Statutory Surplus’]. Statutory Surplus of our insurance businesses was approximately $124bn at 31 December 2015. “This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.” The acquisition of key people and teams to build the BHSI business on an international basis really got underway in December of 2014, when it received its non-life insurance licence in Singapore and named Marc Breuil, former head of AIG’s operations in Hong Kong and Taiwan, as regional president for Asia. In January 2015, BHSI announced that it had received a licence to carry out all classes of general business in and from Hong Kong, as well as several key appointments. In April, the company revealed that it had received a licence to provide all lines of general business in Australia, set up operations in Sydney and named Chris Colahan as president. In June, BHSI received its licence from the Reserve Bank of New Zealand to commence a new business based in Auckland under the leadership of country manager Cameron McLisky. The Asian, Australian and New Zealand businesses have expanded rapidly with the addition of a range of expert people and product launches. The big move in Europe came in March of this year when Berkshire Hathaway International Insurance Ltd [BHIIL] announced it would start offering specialty insurance solutions to European customers via BHSI. The group named Tom Bolt, former director of performance management at Lloyd’s, as president, UK and southern Europe. Gregor Köhler, former risk and insurance manager at German chemical giant Bayer, was named president of northern Europe. Mr Bolt would assume the role of CEO. He and Mr Köhler were also named as BHIIL board members. “Establishing European capabilities is a natural next step in the maturation of BHSI, and an important milestone in growing our global footprint,” said Mr Eastwood at the time. “We are pleased to have the top-calibre talents of Tom and Gregor to lead the efforts to build a team in the UK and Europe.” Those who know Mr Köhler, such as his former colleagues on the committee at the German risk management association GVNW, will not be surprised to hear that he did not hang around. By June, the group was ready to announce an established northern European headquarters in Düsseldorf, Germany, as well as naming key executives. “This is the beginning of our exciting journey to provide long-term solutions for customers throughout the region,” said Mr Köhler. The key appointments were: Jörg Bechert, SVP, head of executive and professional lines, northern Europe, former head of strategy and innovation at AON Germany Ulrich Kütter, SVP, head of marine, northern Europe and most recently head of marine, central and eastern Europe at Allianz Global Corporate & Specialty Leander Metzger, SVP, head of property, northern Europe and former director, AFM at FM Insurance Company Limited’s central European operation Robert Scherf, VP, head of human resources, northern Europe, who joined from Catlin Europe.

BHSI offering stability to risk managers in volatile market

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