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Buffett Just Bought This Company For $1.8 Billion

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 With the United States’ comparatively tiny public health sector, when compared to other developed Western nations, the private health sector is a huge part of the American economy.

One of the most renowned medical professional liability insurers, Medical Liability Mutual Insurance, has been acquired by Berkshire Hathaway, the investment firm through which Warren Buffett has made his name.

Read on for details.

Buffett certainly Hath-a-way of preparing for the future

This is a shrewd move by Buffett.

As public sector spending, as a proportion of GDP, reaches its peak in Western countries, the future may see more outsourcing or healthcare roles to the private sector.

The private sector is more innovative and mobile, and the lack of this in government shows itself by increased privatization in the UK.

Not to mention is the continued establishment and dominance of private players in Europe and the United States.

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Buffett has thus ensured the dominance of a market which will grow in importance.

New York has some 390,000 millionaires.

MLMI just happens to be the biggest underwriter of medical liability for working medical professionals in New York, who undoubtedly make up a big portion of this figure.

The acquisition will mean the company switches from policyholder-owned business, to a stock trading one.

While the deal’s terms have not been disclosed, as the company is not a public one.

Yet, the policyholder surplus was $1.8 billion in December (policyholder surplus is worked out by subtracting liabilities from the assets).

Predictions are that the deal will be completed in the second half of next year.

Such a big acquisition in a heavily regulated industry like healthcare requires massive regulatory and customer oversight.

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A little word on professional medical liability insurance

This section is in case you are a little confused as to what professional medical liability insurance is.

If you are familiar with it, skip to the next section.

It is sometimes called medical malpractice insurance, which elucidates what it is a little better.

It is insurance that medical professionals take out in order to protect themselves against lawsuits for wrongful practices.

Lawsuits result in several things that require a need for hefty insurance:

  • Mental anguish perhaps leading to illness and depress, which in turn increases healthcare costs
  • Defense costs in a case of medical malpractice can be very costly, due to the complexity and meticulousness required of lawyers involved
  • They can often go on for very long, mainly because the arguments tend to be very scientific in nature and thus not as easily intelligible to judges, lawyers, and the jury

Most of the premiums go towards defense or containment costs.

Such is the size of the healthcare industry as a whole, medical malpractice insurance is also a huge industry.

There are two main kinds of malpractice insurance, claims-made or occurrence.

The former essentially is a policy activating when a claim is made and during the entire length of the reporting period while the latter has a ‘policy period’ in which claims are covered.

The industry had a turbulent time around the turn of the millennium when there were volatile changes in premiums, investment, and loss ratios increased markedly to the point where the firms almost went bust.

Ratios peaked in 2001 and have been declining since, with firms seeing an improving performance.

As you can see in the graph below, the amount paid has been going down gradually each year, highlighting the work success the firms have seen since the early 2000’s.

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Head honcho statements and Berkshire’s reasons for investing

Buffett was full of praise for MLMI in an official statement regarding the acquisition.

He lauded it for its 40-year service to healthcare professionals in New York, and quipped that the best things were worth waiting for, implying he had been eyeing up this acquisition for a while.

One might have been able to predict it based on Berkshire Hathaway’s past investment history.

Investment has always been a major target of Buffett’s, mainly because the operations of healthcare giants generates what industry insiders call ‘float’.

This is premiums which generate extra cash that can be reinvested by Buffett before he has to pay claims.

We all know how insurance works.

In fact, exactly ten years ago Berkshire Hathaway purchased a similar company, Medical Protective Company.

It had been operating in the industry for over a century by that point. Generally, however, Buffett relies on giant insurers like Geico (auto) and Gen RE (Life and Health).

Though he does like to add companies that operate in more niche industries from time to time.

The president of MLMI had the following to say about the deal:

  • The acquisition deal will bring the policyholders of MLMI further piece of mind, giving the company added financial security, thanks to Berkshire’s renowned expertise in financial sustainability and forecasting
  • The acquisition to become part of the market leading holding company will ensure MLMI’s ability to expand services, potential specialization, and improved prospects for all accounts
  • Policyholders will get a payout as part of the acquisition deal (more on this later)

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Financial security provided by an ever strongly performing investment company is shown in the graph above.

The deal itself

Policyholders of MLMI will get a payout as part of the deal, which will be based on the total amount of premiums that they paid.

This is direct from the company website.

Financial advisors involved in the deal include such well-known names as Keefe Bruyette & Woods, as well as Wilkie Farr & Gallagher LLP.

Several estimates of the total purchase price are floating around.

One is by KBY analysts and puts the total at about $2.7 billion.

Most of the assumptions do not factor in any attrition of policyholders after the acquisition.

The general sentiment, is the company will continue business as normal, and no policyholders will be opposed to the takeover.

KBW made some further comments about the acquisition.

The first result would be increased float for MLMI.

It will also extend the leadership in the medical malpractice underwriting market that Berkshire Hathaway is enjoying.

It is currently the largest provider in the US, through the companies it owns, according to research obtained from the National Assoc. Insurance Commissioners.

Other big players in the market are the Doctors Company (a physician-led group) and CNA Financial Corporation and the American International Group Incorporated.

This deal takes Berkshire Hathaway’s total market share to about 15%, which is double its nearest competitor, according to KBW.

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