Warren Buffett is not one to deny a friendly helping hand to companies in financial distress — at a price, of course! The Wall Street Journal reported today that a subsidiary of Berkshire Hathaway signed “cut-through endorsements” with AIG and XL Capital when they were struggling last year due to impaired credit ratings. Cut-through endorsements directly protect the buyer of a policy by providing backup coverage in cases where the primary insurer defaults on its obligations.
A brief excerpt from the Wall Street Journal article:
“Buffett is able to do this because of his credit rating, and if there are no claims, he puts the 5% in his pocket,” said Andrew Barile, a reinsurance consultant in Rancho Sante Fe, Calif. He called the surcharges very high for such coverage. A potential concern for AIG and XL Capital would be “the detail [Buffett] gets on your biggest accounts,” which could give Berkshire Hathaway’s insurers a competitive advantage when it came time for the policies to renew.
Just as we have seen in the deals with General Electric, Goldman Sachs, and others, Berkshire Hathaway’s “helping hand” can be a win-win proposition. The entity seeking help gains credibility and Berkshire shareholders earn healthy returns made possible by the company’s Fort Knox balance sheet. And of course, that competitive intelligence on insurance pricing should be useful for underwriting as well.
Disclosure: The author owns shares of Berkshire Hathaway.