Berkshire Hathaway enters Australian insurance market
Warren Buffett's Berkshire Hathaway wants to grow its Australian specialty insurance business - and that's bad news for cozy local insurers IAG, QBE and Suncorp.
The Australian insurance oligopoly is about to get a shakedown. Warren Buffett's Berkshire Hathaway Specialty Insurance (BHSI) opened the doors to its new Sydney office on Monday with 'excess & surplus underwriting capabilities, a hunger for large and complex risks', as the company's website put it.
Specialty insurance generally covers unique situations or rare events that are excluded from standard policies. BHSI says it will focus on 'providing large scale insurance solutions for commercial property and casualty risks'.
Started two years ago to the day, BHSI already employs nearly 600 people worldwide and is on track to write $1bn in premiums this year.
Buffett recruited four executives from American International Group (NYSE:AIG) to run BHSI, and Chris Colahan, a former chief executive (Asia) for RSA Insurance Group, will head the Aussie operations.
In an interview with the Financial Review, Colahan said "We're targeting across Australia and to start with, as of today, we're launching in property, casualty, financial lines and marine cargo insurance in Australia"
Marine is the largest specialty line of insurance globally, and big business for QBE Insurance (ASX:QBE), which wrote roughly US$500m of marine insurance in 2014, making it the sixth largest marine insurer worldwide.
We've been warning for some time that high insurance margins for companies like QBE, Insurance Australia Group (ASX:IAG) and Suncorp (ASX:SUN) are unsustainable as we've reached the peak of the insurance cycle that started after the string of natural catastrophes in 2011.
The most recent interim results showed competition intensifying and premium prices coming down, with insurance profits at IAG and Suncorp falling 9% and 10% respectively.
With the brand, know-how and financial backing of Berkshire Hathaway (NYSE:BRK.B), BHSI won't have any trouble signing on Australian insurance brokers, like Steadfast (ASX:SDF) and Austbrokers (ASX:AUB), with immediate access to their large client bases. We expect the entry of BHSI will put further pressure on premium rates as the incumbents try to retain market share.
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