It is no secret that Berkshire Hathaway Inc. (NYSE: BRK-A) is a top player in the insurance markets. Most of the investing public thinks of GEICO or National Indemnity, and some in the insurance industry may have dealt with Berkshire’s General Re unit.
There was one issue that was brought up by Berkshire Hathaway about health care, and even Charlie Munger discussed the end game probably being a single-payer system. That brings up the notion that Berkshire Hathaway is already big in the medical malpractice and professional liability insurance — and the notion that its malpractice insurance is about to get even larger.
National Indemnity, the Berkshire Hathaway unit, is acquiring Medical Liability Mutual Insurance Company (MLMIC). This acquisition will give the Berkshire unit roughly 20% of the U.S. medical malpractice insurance market after the merger goes through. According to A.M. Best, Berkshire Hathaway’s medical professional liability (MPL) premiums in 2016 were about $1 billion, roughly 14% of the sector’s total premiums. Medical Liability Mutual Insurance was shown to have written roughly $392 million in 2016 premiums.
A.M. Best did show that the total U.S. premiums underwritten have fallen over recent years due to competitive price pressures and due to slumping demand. The report said that the MPL insurance segment as a whole had an underwriting loss of $164 million in 2016, but that is after 10 years of reported underwriting profitability ($82 million underwriting gains in 2015).
The ongoing margin compression of recent years was cited, as was loss increases and loss adjustment expenses incurred and a decrease in net earned premiums. A.M. Best further said of the overall MPL industry:
Despite the decline in profitability, capitalization in the MPL insurance sector remains solid, as its prospects for positive earnings over the medium term favor the stable outlook. Modest increases in claims severity should continue to be offset by decreasing claims frequency trends and lower levels of reserve redundancies. However, A.M. Best believes challenges abound, as changes in health care delivery, tort reform, the emergence of new medicines and surgical procedures, the migration of solo practicing physicians to group and/or hospital employment, cyber security, the influx of insureds into the health care system, a highly competitive market and low interest rates, all contribute to the importance of having strong enterprise risk management.
Dan Teclaw of A.M. Best appeared in a video showing some of the MPL trends. His view is that underwriting premiums remain relatively strong and companies are benefiting from favorable reserves and loss ratios declining. In addition to the competition, he still thinks the overall environment may be weak and that MPL carriers face numerous business challenges in the years ahead.
All of this comes at the same time that the nation’s health care program may be changing as well. The outcome of that effort still remains largely unknown and is still rather contentious topic in Washington, D.C., and on Main Street alike.
When it was announced in 2016 that National Indemnity would acquire MLMIC, Buffett said at that time:
MLMIC is a gem of a company that has protected New York’s physicians, mid-level providers, hospitals and dentists like no other for over 40 years. We welcome the chance to add them to the Berkshire Hathaway family and enhance their capacity to serve these and other policyholders for many years to come.
One interesting thing taking place is that this merger with Berkshire Hathaway also means that MLMIC is demutualizing. After policyholders had been used to receiving dividends back under the mutual insurance structure, now it is Berkshire Hathaway that will be keeping that difference. The Q&A around the deal said:
After the transaction is completed, policyholders will no longer have an ownership interest in MLMIC and, as such, will not receive any dividends.
With its market cap of $402 billion or so, this acquisition of MLMIC is not really enough to move the needle substantially for Berkshire Hathaway shareholders. That being said, it will make Berkshire Hathaway just that much more dominant in yet another field in the world of insurance.