Will Berkshire Buy Employers Re?

Mr. Loeloff believes the two companies would face an immense integration and cultural risk, which would require a lot of management attention. Further, he said he doesnt think that ERC would fit well into Berkshires acquisition strategy.

Berkshire acquires companies with strong management in place because Berkshire's chief executive officer, Warren Buffett, doesnt provide the management team, said Mr. Loeloff. He noted that the ERC management team has been in transition over the last couple of years, which might limit its appeal.

Mr. Buffett also would look at the long-term value of a company, he continued. Although Berkshire would get a sizable float from such an acquisition, Mr. Buffett "wants a company that has proven earnings consistency, and he doesnt want a turnaround situation," he said.

S&P has publicly stated its concerns about the reserve adequacy of ERC, which has taken hits this year in terms of reserve strengthening, Mr. Loeloff noted, "so that could be a sizable concern going forward."

"There is an enormous amount of pressure on Berkshire to make Gen Re work," said Mr. Dreyer. "Thats outside pressure and internal pressure as well." Mr. Dreyer said that adding ERC to the mix might derail that effort.

After the amount of money that Mr. Buffett has had to funnel into Gen Re over the past year-and-a-half, "I cant imagine he would take an open-ended sale," said a reinsurance broker who didnt want to be identified. "GE would have to provide some guarantee on the reserves. That probably would stymie the deal."

Several brokers speculated on how an acquisition of such magnitude would affect the market.

Steve Bolland, senior vice president with Gill and Roeser, a New York reinsurance broker, speculated that a Berkshire acquisition of ERC could limit the choices for buyers. "Insurance companies over the last few years have shortened their approved security list because reinsurance recoverables have become a big issue," particularly for long-tail liability coverages, he said.

"Its a short list already. But when you get consolidation among the tier-one reinsurers, that really shortens up the tier-one security list," Mr. Bolland said.

Some insurance companies that want long-tail coverage arent willing to drop below tier one, and therefore, to an extent, "its a little anti-competitive because there arent very many other markets you can go to if somebody is demanding a tier-one product," Mr. Bolland said.

"If the deal does happen, from a client perspective, I dont think theyll be overly enthusiastic about it," said a reinsurance broker who didnt want to be identified. "It reduces the choices, particularly in the U.S."

"I think the clients again will say, one plus one is not going to equal two," he added, explaining that clients wont want to put all their eggs in that one basket. "Theyre going to continue to look for alternative choices."

"There is still a wide and varied global reinsurance market," said Mike Koziol, senior director and counsel for the National Association of Independent Insurers in Des Plaines, Ill. "This [deal] perhaps could rearrange the hierarchy of who is number one, two, three and four, but there are hundreds of reinsurers worldwide."

For example, he noted, "the top 150 global reinsurers in 2001 had net premium of nearly $100 billion, backed by $245 billion in surplus, so that should give perspective as to the width and breadth of the global market."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.