Berkshire Hathaway’s plan to purchase a medical professional liability insurer specialty writer may have greater implications for the sector at large. Fitch Ratings said the M&A agreement will likely spur further consolidation.
“Fitch believes the MPLI sector, which includes a large number of undiversified specialty underwriters, is likely to see further acquisition-related consolidation in the next few years,” Fitch said in a post on its Fitch Wire credit market commentary page.
The reason why: Fitch said that the market now offers limited opportunities for MPLI specialists that choose to stand alone.
“Following a decade of highly favorable profitability and strong capital formation, many MPLI specialists with strong capital positions have limited opportunities for future capital deployment as the broader MPLI market is faced with declining premium volume, increasing price competition and deteriorating underwriting performance,” Fitch said.
News broke on July 18 that Berkshire Hathaway would be buying Medical Liability Mutual Insurance Company for an undisclosed price, now that the New York-based insurer has completed its conversion from a mutual company to a stock insurer.
Fitch said that Berkshire’s move on the insurer, by way of its National Indemnity Company subsidiary, reflects a broader growth strategy for the U.S. primary commercial lines sector. The deal also makes sense, Fitch wrote, because Berkshire is the largest MPLI writer in the U.S., with 2015 net written premiums of more than $1 billion and a 13 percent marketshare. Post-acquisition, that MPLI market share jumps to 18 percent, Fitch noted.
The second largest MPLI writer – The Doctors Group – has an 8 percent market share, Fitch said.
Fitch did point out that there are risks in acquisitions tied to challenges with integrating cultures, estimating loss reserve adequacy and correctly valuing target companies. But MPLI merger activity could help the sector gain big by promoting more effective capital allocation in the future, Fitch said.
Source: Fitch Ratings