Berkshire Hathaway, Inc.
Legal insights into an insurance investment strategy
Warren E. Buffet's Berkshire Hathaway's company strategy since the global economic crisis in 2008 has been characterized by what some would call 'safe-but-boring' industries. Consistently outperforming on the S&P, the Company has been effective where others have not. The foregoing project proposal looks at the decision making model(s) used by BH in investment in the insurance industry, with a hypothesis that one Selective Insurance Group (SIG) will emerge as the target for acquisition. Attendant to this study of competition and crisis is the formative role that insurance law plays in investment and the impact of corporate counsel as a functionary aspect to the insurance business. Employing a Six Sigma assessment approach, corporate case studies and aggregate insurance industry data are put into dialogue with the history of client litigation by those firms.
TABLE OF CONTENTS
Abstract
Introduction 4
Problem Statement 5
Literature Review 15
Methods 15
Data Analysis 16
Implications of Study 18
Appendices 19
INTRODUCTION
The research proposal looks at Selective Insurance Group's (SIG) legal staff for further insight into the history of adverse corporate litigation between the two firms, and potential for mutual assent and future benefits in negotiation of the price of those agreements. As legal staff/counsel, those parties present significant risk in the context of such a deal, yet are also invaluable in terms of making it happen. Adverse relations in prior years between the two parties would have to be articulated within any merger writings.
Why SIG is a better opportunity for CEO, Warren E. Buffet's Berkshire Hathaway, Inc. (BH) in the present moment has much to do with global constrictions on insurance as an industry, and the capacity of the future parent company to control or merely correct via change management practices or assume risk (i.e. debts and current/future client litigation). Where BH is better off purchasing New Jersey-based SIG, is that its holdings are primarily U.S. based making them subject to national federal law; and despites some recent losses, stock performance has not galvanized collapse.
Rationale for not purchasing a larger holding company, such as ACE, with its now relocated headquarters in Zurich, Switzerland, is quite evident given the recent legal conundrum faced by a holding firm also operating under Swiss law, Transocean; citing a total insurance policy of $560 million on the British Petroleum (Bp) rig that led to oil company's spill in the Mexican Gulf. Through subsidiaries, the former Cayman Islands based ACE Ltd. sells property and casualty insurance, life insurance, and reinsurance through subsidiaries around the globe with its subsidiaries operating in about 50 countries to customers in over 170 nations. The formative role that insurance law plays in investment in high risk indemnity firms and the impact of corporate counsel as a functionary aspect to the insurance business is addressed.
PROBLEM STATEMENT
Since the 1990s, Selective Insurance Group (SIG), a holding company, has sought expansion outside of its original service area in New Jersey in the Midwest and Eastern Seaboard of the United States. At present the state accounts for 20% of the Group's earnings. Commercial insurance sales comprise over 80% of the Group's sales (Hoovers, 2010). Small and midsized businesses and government entities constitute the market segments to the majority of SIG's commercial policy holders; sold by its seven subsidiaries.
Commercial services include workers' compensation and commercial automobile, property, and liability insurance, with personal lines dedicated to homeowners and automobile insurance. Some nine hundred and sixty independent field agents are now able to manage accounts through the Group's online 'One & Done' automated underwriting templates, and sustain their franchise representation through market Selective Insurance products. In 2009 SIG sold its loss leader, a human resources administration outsourcing business, and liquidated its federal flood insurance administration services business into its other insurance operations (Hoovers, 2010). A recap to SIG's 2009 financial statement is available in Table 1.
Table 1
Company Type
Public - NASDAQ (GS): SIGI
Headquarters
Fiscal Year-End
December
Financial Filings
SEC
2009 Sales (mil.)
$1,514.0
1-Year Sales Growth
(10.7%)
2009 Net Income (mil.)
$36.4
1-Year Net Income Growth
(16.8%)
Table 1. SIG Summary Financial Statement, 2009 (Hoovers, 2010).
Stock performance as of 26 November 2010 reported losses to SIG's financial picture seen in Table 2 and Graph 1.
Table 2
Detailed Quote (NASDAQ (GS): SIGI)
Latest
(11/26/10-13:00:00 EST)
Change ($)
Change (%)
High
Low
$16.68
-0.0800
$16.79
$16.63
Prev Close
$16.76
Open
$16.63
Bid
$16.26
Bid Size
Ask
$18.29
Ask Size
High
$16.79
52 Wk High
$17.93
Low
$16.63
52 Wk Low
$14.13
Restricted
No
Volume
27,026
Market Cap ($ mil.)
EPS
$1.24
P/E Ratio
13.44
Table 2. SIG stock performance 26 Nov 2010 (Hoovers, 2010).
Graph 1. SIG stock performance 26 Nov 2010 (Hoovers, 2010).
With persistence of this caliber of performance, it is likely that SIG will consider offers of acquisition or merger. Losses following the global financial crisis are set to continue. SIG will be looking for methods of cutting loss leaders, and opportunities for growth. Investment partnership may be adequate, but given an offer for purchase by an entity like BH with strong long-term liquidity, measured by performance and credibility of its stockholders, SIG may assent to such a purchase.
Comparatively speaking, SIG is an attractive entity for investment or purchase, due to: 1) size; and 2) potential for U.S. market...
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