Showing once again his unparalleled knack for bucking the conventional wisdom, the Oracle of Omaha has decided to ignore massive public whinging from both the A.M.A. and his comrades in the insurance industry about the sad and sorry state of the medical liability market. As state-level caps on noneconomic malpractice awards spread like wildfire, Mr. Buffett's Berkshire Hathaway has chosen to buy outright the largest private U.S. medical liability insurer -- GE's Medical Protective -- in a deal valued at more than $1 billion.
Berkshire, which receives a good bulk of its float from ownership of reinsurer General Re and auto insurance giant GEICO, had given notice a week earlier that a big insurance acquisition was coming. Meanwhile, GE CEO Jeff Immelt had been dropping hints during several recent conference calls that the company was not necessarily adverse to divesting its property/casualty holdings, particularly after successfully spinning off its life division last year with the $2.9 billion IPO for Genworth Financial.
I was among many who put two and two together and anticipated a deal between these two incredibly diverse corporate behemoths. But before I pat myself on the back too eagerly, my hunch had actually been that Buffett would make a play for ERC -- GE's workers' comp and reinsurance unit -- given the natural synergies that would seem to exist with General Re.
While GE may have soured on the insurance business, Berkshire is clearly getting Medical Protective at an opportune moment. Ron Pressman, GE's property/casualty chief, has spent close to four years cleaning up the balance sheet of the entire P/C operation, which now goes by the moniker GE Insurance Solutions. After suffering a net loss of $1.8 billion in 2002, Pressman restructured the company's risk portfolio throughout 2003 and 2004 by selling $3.9 billion of its least profitable business, hiring 1,200 new employees, and ending 2003 with the greatest level of statutory capital in the company's 90-year history.
Furthermore, medical liability remains one of the few lines of business where capacity is scant and writers are still retaining, and building on, the huge price increases of the post-Sept. 11 hard market. Yes, claims costs have kept pace as well, but in the able Mr. Buffett's hands, that three- to five-year lag between filings and settlements can make all the difference in the world.
In other news of interest to Buffettologists, Jon Friedman wonders why the media haven't come down harder on the old man over his links to the finite re scandal that has taken down fellow industry titan Hank Greenberg of AIG (My guess: it's for the same reason we tend not to come down as hard on Cutco for making sharp knives as we do the mugger who uses one on an old lady.)
And providing evidence that the title of Luki Vail's book was more than just a clever play on words, the WSJ reports that both famous Messrs. Buffett -- Warren and Jimmy -- are interested in genetic tests to see if they are, in fact, related.
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