AIG has been a top workers' compensation underwriter for decades. Traditionally, that book has been heavily reinsured by the usual instruments (facultative, treaty, quota share, etc.) and business arrangements. Much of that was through reinsurers owned by Warren Buffet's Berkshire Hathaway group. However, that is about to change.
In a less than shocking announcement, AIG has decided to discontinue their reinsurance association for new business with Berkshire Hathaway's property/casualty insurance unit, Berkshire Hathaway Specialty Insurance. The decision was apparently made after several of AIG's key executives left the insurer for Berkshire last April.
Those leaving AIG last spring to move to Berkshire Hathaway were Peter Eastwood, CEO of AIG Property Casualty in the Americas; David Bresnahan, president of AIG's excess and surplus unit, Lexington Insurance; Sanjay Godhwani, president for Latin America and the Caribbean for AIG Property Casualty; and David Fields, head of global casualty for AIG. In its initial response, a spokesman for AIG remarked, "AIG has strong leadership in place. AIG has a seasoned and very deep bench of talented property and casualty executives ready to assume broader responsibilities."
Despite the foregoing statement, this development obviously did not sit well with Robert Benmosche, AIG's CEO. Berkshire CEO Warren Buffett said publicly that the AIG executives had approached Berkshire seeking opportunities, not the other way around. Benmosche responded with, "That kind of sounds a little strange to me. I'm surprised that Warren would want to get into a business and wait for people to call," and then, somewhat predictably, "We have plenty of talent. And so, Warren wants to take a few people, and wait for them to call him to build a business, God bless him."
Peter Eastwood added fuel to the fire by remarking in a June interview that he was having no difficulty finding talent to help fill out the new Berkshire reinsurance unit, "Talent attracts talent. We'll absolutely be hiring more [people]." At that point, nearly half of the new unit's staff of 40 had followed Eastwood and the others over from AIG.
Of course, the recent action announcing that AIG is severing reinsurance ties on future business with Berkshire belies the "all is well" attitude by AIG's CEO to Warren Buffet and his property/casualty organization. The company had a long history of ceding reinsurance premium to Berkshire on all lines including workers' comp, and severing this relationship heralds a new direction for AIG, and a clarion call about the developing competition between Berkshire and American International Group.
The size of the financial relationship between the two companies was rather significant. Statistically, Berkshire reinsured more of AIG's risks than any other company, with $2.19 billion recoverable under the reinsurance contracts, including reserves, based on a regulatory filing with data as of Dec. 31, 2012. That equates to approximately 8.5 percent of the reinsurance total at AIG. This amount includes a 2011 agreement in which AIG agreed to pay Berkshire about $1.6 billion when Berkshire took on reinsurance risks related to asbestos exposure. So almost 10 percent of AIG's reinsurance business will be in-play looking for new reinsurance outlets.
Simultaneously, Berkshire is looking to take market share away from AIG (and others) through the business unit that Peter Eastwood started for Berkshire in April. Buffett has confirmed that he is seeking to get into commercial insurance "big time." Eastwood's new operation complements Berkshire units selling reinsurance and auto coverage, and can provide Berkshire Hathaway more funds to purchase stocks and fund acquisitions. That fits well with the strategy that Buffet has espoused about organic growth supplemented by corporate takeovers.The new business unit has already written a "good amount" of property risk and is planning to provide coverage particularly in catastrophe-prone areas. Berkshire Hathaway Specialty is also offering some casualty products and looking to market professional and management liability insurance.
Of course, all this adds to Robert Benmosche's dyspepsia. An accident and health professional by background and experience, he is relatively new to the property/casualty arena, his first acquaintance with this business segment being when he assumed the helm at AIG as CEO. Warren Buffet's expanded foray into the excess and surplus lines area, loudly announced by enticing four seasoned AIG executives to defect to Berkshire and start a new business unit, had to be unsettling to Benmosche, despite his cavalier responses to inquiries involving this situation. Therefore it was not particularly anomalous to learn that AIG was ceasing future reinsurance ties with Berkshire.
So where does this leave AIG? Considering the firm survived the loss of the iconic Hank Greenberg, with ultimate help from a government bailout, the defection of four talented executives to Berkshire Hathaway is not going to cause much of a ripple in their business pond. The more intriguing question is which reinsurer(s) AIG will find to take the place of Berkshire on new policies. There is a lucrative amount of money at stake, and it stands to reason that there are numerous reinsurers scrambling to fill the void left by the announcement. Capacity will probably not be a problem. There will a great deal of workers' comp business in that book looking for new reinsurance post haste.
Of course, AIG can elect to increase their business proportionately with the reinsurers with whom they still do business, rather than trying to find a replacement to Berkshire, with that company receiving almost 10 percent of AIG's ceded premium. As the industry ponders the outcome, Warren Buffet has to be smiling. Although he lost a significant amount of future business from AIG, he stands to make that and more up as he invests capital into his new business unit which will most assuredly ultimately become a major force in the P/C arena.
JOHN D'ALUSIO has more than 30 years of experience in insurance and claims. He can be reached at email@example.com.
October 8, 2013
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