Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

(Updated )

Warren Buffett's Berkshire Hathaway is diving deeper into its core competency: insurance. 

On Monday, the Omaha-based conglomerate agreed to buy Medical Liability Mutual Insurance Co., a New York underwriter of medical professional liability insurance, in a deal worth an estimated $2.7 billion. Then on Tuesday, Berkshire announced its entry into transactional liability insurance, which covers the risks and uncertainties associated with mergers, acquisitions and other corporate transactions.

It's a logical move for Berkshire, which itself has been involved in 190 M&A deals since 2000, according to data compiled by Bloomberg. Predating that, there were other deals including the 1955 merger between the eponymous Berkshire Fine Spinning Associates and Hathaway Manufacturing Co. 

Know Your Customer
Berkshire has been involved in 190 M&A transactions since 2000
Source: Bloomberg
*As at July 19, 2016

Berkshire's deep dealmaking expertise gives it an insight into how important this type of insurance is for many buyers and sellers, at all points of the M&A cycle. Deals often hinge upon such policies, which protect companies from risks that can arise relating to environmental exposures, uncertain tax positions, known litigation, breaches of warranty and more. In initial public offerings, it can cover directors and company officers against claims of misleading or false statements. 

As the business is being built from scratch, it will take time for this commercial insurance subsidiary to make a meaningful contribution to Berkshire's wider insurance operation, which posted underwriting profit of $1.8 billion in 2015. But the company has both the staying power and a successful track record as an insurer. Geico, for instance, had 11.4 percent of the auto insurance market at the end of 2015, compared to 2.5 percent when Berkshire acquired control of it two decades earlier, in part due to its aggressive pricing.

Insurance Policy
Berkshire Hathaway's Class B shares have risen roughly sevenfold since they were made available to investors in 1996, thanks largely to its insurance holdings
Source: Bloomberg

Keeping that in mind, existing transactional liability providers including Chubb and AIG should prepare to defend their turf. But they will likely be delaying the inevitable. Berkshire -- with its industry prowess and deep pockets -- has the traits of a worthy competitor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects sixth paragraph of story that was published on July 19 to show that Berkshire would compete with Chubb, not Marsh & McLennan and AON, which are insurance brokers.)

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net