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Berkshire's New Insurance Push Driven by Lack of Price Spikes

Source: WSJ - Erik Holm

Posted on 12 Jun 2013 by Neilson

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Berkshire HathawayWarren Buffett's Berkshire Hathaway Inc. is taking a big new plunge into the business-insurance sector in part because of a shift in the way the sector operates, a top executive at the company said.

Mr. Buffett and his insurance lieutenant, Ajit Jain, have long been known for jumping into the commercial insurance sector when prices spike. But the executive leading Berkshire's new push said Tuesday that significant price increases are becoming far less common because of how quickly fresh capital can be deployed to react to those price increases.

That's why Berkshire is looking at "operationalizing our balance sheet in a more permanent way, long term," said Peter Eastwood, who recently jumped to Berkshire from American International Group Inc. (AIG) to head the new effort.

In recent years, hedge funds and other large investors have snapped up catastrophe bonds and provided funding for so-called sidecars that inject capital into the insurance market. Both allow investors to potentially earn money by supplying the capital that would be used to pay used to pay claims if a disaster strikes.

"There's a lot of capital that's sitting out there that sees the returns as relatively positive" for such investments, said Mr. Eastwood, who was speaking at the Advisen Property Insights Conference in New York.

In the past, private-equity firms and other investors formed new companies after major natural disasters, such as 2005's Hurricane Katrina, in order to capitalize on the price spikes.

But now, Mr. Eastwood said, investors in catastrophe bonds and sidecars "can get in and ... can get out" again quickly when returns become less attractive.

"That's sort of the way the industry is going to work on a going-forward basis," he said. Because the fresh capital can react quickly to price spikes, it will "have a market-dampening effect," he said. And that outlook, he said, was "part of what's the driver" behind Berkshire's new push.

Mr. Eastwood, who had previously headed AIG's U.S. property-casualty operations, departed to Berkshire along with a handful of other AIG executives in late April. Other defectors included David Bresnahan, president of AIG's Lexington unit; Sanjay Godhwani, president for Latin America and the Caribbean for AIG's property-casualty operations; and David Fields, another senior property-casualty executive.

Mr. Eastwood credited Mr. Godhwani as being the one who "convinced" Mr. Jain to launch the new endeavor.

But Mr. Eastwood said that the creation of the new unit wouldn't push Mr. Jain's business to the sidelines.

"Ajit Jain being in the marketplace and proving that capital when it's most needed ... will continue to be part of what the business model is at Berkshire," Mr. Eastwood said. He contrasted that with his own role: to put some of Berkshire's capital "in the marketplace in a more permanent long-term focused way."