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Berkshire Hathaway Inc. (BRK.A), American International Group Inc (AIG): Warren Buffett Embraces an Old Love

It didn’t take long after Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) welcomed four former American International Group Inc (NYSE:AIG) executives into the fold that it introduced a new, specialty insurance arm to the world.

Based in Boston, Mass., the new entity will sell commercial insurance products encompassing property & casualty, as well as professional liability insurance. The public got some insight into Buffett’s plan when the AIG crew came on board, but the Oracle had been planning this move for some time, telling Bloomberg right before Berkshire Hathaway Inc. (NYSE:BRK.A)’s annual meeting, “We would like to get into the commercial-insurance business very big time.”

Berkshire Hathaway Inc.

Insurance is in Buffett’s blood
It’s no secret that Buffett has a soft spot in his heart for the insurance industry. His company currently owns GEICO Insurance and reinsurer General Re, and he can thank the insurance industry for much of his success: For while there is no doubt that Buffett is a premium investor, the insurance industry has provided him with the fodder needed to grow his empire.

GEICO was one of Buffett’s first loves, headed as it was by his idol, Ben Graham. Buffett invested heavily in GEICO, even against Graham’s advice — by his own admission, up to 75% of his net worth by the early 1950s — and, he made money. Knowing how to invest money has always been his strong point, and the insurance industry provides just that: inflows of money begging to be invested until the time to pay out occurs, sometime in the future.

Take Berkshire Hathaway Inc. (NYSE:BRK.A)’s purchase of Cna Financial Corp (NYSE:CNA)‘s and AIG’s asbestos liability in 2010 and 2011, respectively. For a total of $3.65 billion, Buffett took on $3.5 billion of liability in American International Group Inc (NYSE:AIG)’s case, and $1.6 billion from Cna Financial Corp (NYSE:CNA). This gave Berkshire a nice big bag of cash to invest, while asbestos cases continued to wend their way through the courts for years. Meanwhile, two troubled insurers received the Berkshire Hathaway brand of security regarding their own future liability in that arena.

New unit is up and running
Back at Berkshire Hathaway Inc. (NYSE:BRK.A), Buffett’s new hires have made short work of getting the new unit ready to go. Peter Eastwood, president of the new insurance arm, has hired 40 people in just six weeks, with staff housed not only in Boston, but also New York, Los Angeles, Chicago, and Atlanta. Some of those employees include former workers at both American International Group Inc (NYSE:AIG) and Cna Financial Corp (NYSE:CNA).

Eastwood says the new company will focus first on areas of coverage that current providers aren’t supplying, adding that much work has been done in writing property and casualty policies, and that the insurer will be wading into high-risk areas, as well. As far as elephants go, it looks like Buffett may have created one of his own.

The article Warren Buffett Embraces an Old Love originally appeared on and is written by Amanda Alix.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends American International Group Inc (NYSE:AIG) and Berkshire Hathaway Inc. (NYSE:BRK.A). The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: Long Jan 2014 $25 Calls on American International Group.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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