Here Comes Berkshire Hathaway

When a veteran of CNA joined Berkshire Hathaway Specialty Insurance to lead the new venture’s professional liability division a few weeks ago, the news did not receive the press that followed the first four recruits who left American International Group (AIG) to launch the new insurance organization.

But that initial media attention is one factor that has helped the new unit quietly build out its ranks tenfold in just a few months, according to Berkshire Hathaway Specialty Insurance President Peter Eastwood, one of the first recruits.

According to Eastwood, the initial buzz has drawn attention from people around the industry interested in joining the team.

Eastwood discussed plans for the newest entrant into the U.S. excess and surplus lines (E&S) market and its progress in a recent Carrier Management interview.

At the start of week No. 7, the startup already had business on the books and 40 professionals in five offices. Eastwood, who sat down with Carrier Management a day after Dan Fortin joined his team from CNA, said that less than half of the 40 professionals now on board followed him and the first three employees – Sanjay Godhwani, David Bresnahan and David Fields – from American International Group (AIG).

“For those of us who left AIG initially, it really was about the opportunity that Berkshire Hathaway presented. It’s really not about AIG,” Eastwood said, responding to a question about the impetus for the move.

Eastwood provided an overview of how the team is coming together in the firm’s five offices – in Boston, New York, Atlanta, Chicago and Los Angeles:

• Fortin, who worked at CNA for 22 years and had a stint at Aon Financial Services Group as well, will lead management and professional liability businesses, which Bresnahan will oversee along with other casualty lines.
• Godhwani is overseeing property and program business.
• Fields is the chief underwriting officer, and has oversight of the actuarial, reinsurance and finance functions.

Eastwood said the company will build out the leadership team and then the underwriting teams.

The following is an edited version of the complete interview with Eastwood that was published by CarrierManagement.com on June 17, 2013.

What type of business do you anticipate your company writing?

Eastwood: Our initial focus will be building out the business in the United States. It will be a broad-based commercial property and casualty insurance operation – predominately focused in the E&S (excess and surplus lines) market.

Having said that, we do have admitted paper. There will be certain businesses that we’re involved with that really lend themselves to admitted market capabilities.

The casualty business will consist of traditional casualty, both primary and excess, as well as management and professional liability and program business. Management liability, specifically D&O, tends to be more of an admitted market opportunity, as does the program business.

So distribution is not exclusively wholesale.

Eastwood: We’re working with retail and wholesale.

There is speculation suggesting that the team might be contemplating writing some small-account business in order to generate a multi-billion-dollar premium volume figure in the next few years, somewhat similar to the business that Berkshire’s United States Liability Insurance writes today. When you say “E&S,” are you including this small-account business in your definition?

Eastwood: It won’t be small account focused outside of the program business, where we enter into agreements with outside managing general agents and work with them on homogeneous classes of business. The portfolio of companies that fit into those programs tend to be small business opportunities, but not exclusively.

But our focus will be [on] upper middle-market all the way through Fortune 100 accounts.

Can you tell us anything about the structure of the business. I read a comparison recently to the early days of ACE and XL, when they were writing excess casualty business.

Eastwood: It’s not an opportunity similar to what ACE and XL did in the 1980s. I think we’ve got an opportunity to be a primary player, [not just] a high excess player. You’ll see us in all lines of business, participating on programs where it makes sense for us to be in a customer market.

There are a number of reasons why the E&S space is intriguing to us, offering benefits from a customer perspective. [One is] the freedom that you’re afforded from a forms perspective in terms of your ability to tailor coverages – to be innovative, to be creative and responsive to what customer needs are. The E&S marketplace provides that substantially.

What people should expect from us is that level of creativity, that level of innovation – really trying to work with customers and brokers to put creative structures, creative products in to the marketplace, but ultimately to satisfy the customers’ needs.

Why did it make sense to set this operation up now? And why set it up at Berkshire? Why not at AIG?

Eastwood: Berkshire Hathaway is an organization that both knows and values the insurance business. The team and I were attracted to that.

Second, our business is a risk-taking business, and Berkshire has a balance sheet that allows us to take risk. Collectively, for Berkshire’s flagship company, National Indemnity and its affiliates, policyholders surplus is approximately $100 billion.

From my perspective, as I have watched this business over the last 20 years, I think risk is getting bigger. It’s getting more pronounced.

The frequency of the natural catastrophe events that are happening is greater than it’s been.

A company with a big balance sheet and strong financial ratings will ensure customers that when a loss takes place, they’ll be around to pay it and continue to write the business. The other thing that’s appealing about Berkshire Hathaway is its brand. Its reputation broadly in corporate America is one of integrity, of smart business, of doing the right thing.

Despite the past problems at AIG, we could say that some of these things apply. AIG now has a strong balance sheet and a reputation for innovation, for knowing the business. Why not AIG? Why look elsewhere?

Eastwood: I try not to get into AIG. For me, and I’ll speak for the rest of the team, those of us who left AIG initially, it really was about the opportunity that Berkshire Hathaway presented and the things I just mentioned. It’s really not about AIG.

I’m sure they’ll continue to be successful. I have a lot of friends there – a lot of people that I have a tremendous amount of respect for.

Outside of that, I’ll leave AIG to AIG.

In a television interview (on Bloomberg TV the day before Berkshire’s annual meeting), Warren Buffett said “They came to us. They’ve called us.” How did the events actually play out to bring you and the other three AIG leaders on the initial team to Berkshire?

Eastwood: I have had a relationship with Ajit Jain [head of Berkshire Hathaway Reinsurance] for a number of years. I have known Ajit really from my days as CEO of Lexington Insurance when we were a buyer of reinsurance. That relationship developed at that time. It’s a relationship that’s been maintained.

There’s nothing more to what took place seven weeks ago than a business relationship resulting in an opportunity.

You said you wanted to leave AIG to AIG, but I do want to give you a chance to react to something that Robert Benmosche, CEO of AIG, said when asked about your April 29 departure with the three other executives. He said, “This group doesn’t agree with the one AIG strategy we have – to make this company more integrated and working more as a team.”

Eastwood: I don’t have any interest in responding.

What I will tell you is that when I look at the business, I look at it in very simple terms. No matter how complex a company is, I believe you can boil it down to two things: the balance sheet, or the financial capital that’s on the balance sheet and the quality of that capital, [and] people or human capital.

So the team’s objective is essentially to find very talented people to attach to the Berkshire Hathaway balance sheet – essentially to operationalize that balance sheet.

At the core of what we do will be culture – and that culture will be one of collaboration, of teamwork, a culture where people who get up in the morning and come into work for Berkshire Hathaway Specialty Insurance feel that they’re treated respectfully, civilly, with dignity.

And it will be a culture of meritocracy where those who make the greatest contribution to the success of the organization will be given the greatest opportunities in terms of access, exposure, additional responsibility, compensation – all the things that are important to individuals.

Teamwork will be essential to what we accomplish. We have no interest in having any one individual on the team stand out as being larger or greater than the totality of the organization.

What would you say is your competitive advantage right now? Why is the business coming to you? There is speculation that suggests that because Berkshire has such clout, that you’re going to charge lower prices and move the market down.

Eastwood: I don’t think it’s any more complex than the things I mentioned to you earlier – the size and quality of the balance sheet, positive business reputation that Berkshire Hathaway enjoys in the business community, and the quality of the people.

Putting myself aside, I think about the three individuals that I left AIG with, and I believe they are terrific professionals. I believe they are people that customers and brokers want to do business with. I believe they’re all individuals that potential colleagues want to work with and want to work for.

That’s my basic premise – that if you have a quality balance sheet, a positive business reputation and the people that you ask to operationalize the organization come to the organization with a requisite amount of knowledge about the business, make smart decisions to create the appropriate strategies and then effectively execute on them in a way that’s not only satisfactory to Berkshire Hathaway, but also satisfactory to customers and brokers, then by and large, it’s a winning proposition.

We talked about why the business is moving to Berkshire. One question people are wondering about is whether that business is moving from AIG.

Eastwood: I can’t really tell you whether it is coming from AIG or not. I would tell you that we’re being placed on programs, and I’m sure, in some instances, we’re winning business from others in the marketplace. In other instances, customers are buying additional capacity and putting us on their programs.

There is speculation about how big the company is going to be, with some commentators indicating a possible goal of $5 billion in near-term timeframe. Do you have a number in mind? Do you have aspirations of being bigger than Lexington or growing faster than Ironshore?

Eastwood: I do have a number in mind. It’s not one I’m going to share publicly.

Having said that, our aspiration is to build as big of a business as we can, assuming that we can generate acceptable margins. And that is predicated on us being relevant in the marketplace – on customers and brokers saying that they believe in the value proposition that I have already described.

If so, then I fully anticipate that we’re going to be a very large presence in the commercial property and casualty insurance space. It’s as simple as that.

We haven’t talked about market conditions. Are you able to get adequate prices on the business you write? Are prices coming down?

Eastwood: At this point, we’ve got a small portfolio of business. So given the amount of risk and the opportunities that are in the marketplace, we are finding risks that are a fit for us, where we think that the pricing is appropriate, where the terms associated with the program are appropriate, and where there’s a like-mindedness in terms of longevity, long-term perspective for us and the customer.

In these early days, we’re finding that there’s a lot of opportunity, and the marketplace is such that it’s appealing to be in the business.

CarrierManagement.com is a new information and management resource for property/casualty insurance carrier executives from Wells Media Group. For more information, visit: www.CarrierManagement.com, where the full interview with Eastwood originally appeared.