An Extremely Unique Bird
At 17 State Street, a curved building towering above the wind-whipped southern tip of Manhattan, Peter Eastwood passes on the corner office he uses for his visits and takes a seat at the shared underwriting desk of Berkshire Hathaway Specialty Insurance.
Eastwood, who defected from AIG a year ago with three other high-profile executives to start this new unit in Warren Buffett’s empire, works out of the company’s Boston headquarters, but he spends much of his time on the road, meeting brokers and clients and visiting regional offices in Atlanta, Chicago, Los Angeles and here, in New York.
In this 22nd-floor outpost, overlooking New York Harbor and the Statue of Liberty, senior managers have roomy offices from which they can watch cargo and cruise ships, tankers, tugs and ferries. But the open underwriting desk (with its own to-die-for views) serves a dual purpose, both symbolic and practical, in promoting a culture of collaboration in an industry that often bestows its greatest rewards on the fiercest sharks in the tank.
To determine if the 16 workstations might be a little too close for comfort, the CEO spent the day working elbow-to-elbow with the underwriters. The verdict: the open underwriting desk stays.
Designing office layouts hardly ranks as Eastwood’s foremost challenge, but the story illustrates some of the defining features in the early life and budding mythology of the company commonly known as BH Specialty. Spend time getting to know Eastwood, and you find these qualities define him, too.
Decisions are made thoughtfully but quickly, unhampered by the slow grind of bureaucracy and the care and feeding of egos.
“On Day 1, I observed firsthand how, regardless of title, rank or role, everyone was willing to roll up their sleeves and help me,” says Leo Carroll, who left a long career with Zurich last summer to become the senior vice president of healthcare professional liability and employee No. 55.
BH Specialty quickly built an all-star roster of underwriting talent, and with the backing of Berkshire Hathaway’s financial firepower, an air of cockiness might seem inevitable, even warranted. But it would not go over well with the boss.
“I remind our team that building a business is a lot of hard work, and winning isn’t normal,” Eastwood says. “We need to show up in the marketplace with a tremendous amount of pride and confidence in who we are and what it is that we’re building, but also with a lack of arrogance and a bit of humility.”
After all, he says, “We are not entitled to anybody’s business.”
For employees from large companies with layers of management and established systems, starting with no preconceived notions can be both unsettling and exhilarating.
“When we make decisions about how to build the company and how we want to operate, we don’t take anything for granted,” says Lori Spoon Rafkin, senior vice president for customer and broker engagement, who left a similar role at Zurich to become employee No. 40 at BH Specialty. “Not even the software on our computers.”
The decision to forgo PowerPoint might seem downright heretical, but managers agreed the company would be better off without it.
Simplicity and transparency are mantras around here. Claims executives often take part in customer discussions during the quoting process to ensure everyone is clear on the specific risk exposures and how the policy will respond.
At many companies, underwriters wait as long as possible to submit a quote so they can get the best read on the market. But BH Specialty’s healthcare liability group aims to be first—“setting our own position, our own pricing and making it easier for the broker and customer to see what we have to offer,” Carroll says.
While these qualities may set BH Specialty apart, they don’t necessarily make insurance buyers and brokers take notice. But they are. The industry has never before encountered a new insurer with this much talent, capital and security wrapped up in a brand that garners universal respect.
“They are an extremely unique bird,” says Stacey Regan, deputy treasurer for General Electric and a member of BH Specialty’s customer advisory board. The big question is what role this unique bird will play in an already saturated market.
Kimarie Stratos, general counsel at Memorial Healthcare System in Hollywood, Fla., tested BH Specialty’s mettle when she sought coverage for one of South Florida’s most challenging risks, which other domestic carriers wouldn’t write. Under Florida law, public hospitals, like other public entities, are liable for just $300,000 in damages, even if a jury awards much more. But lawmakers can vote to override the cap on a case-by-case basis. In the litigation hotbed of south Florida, public hospitals have faced malpractice verdicts as high as $15 million.
“I really didn’t anticipate that at this stage of the game they would give us the kind of quote and coverage that would encourage us to move our business,” Stratos says. “But Peter and his team got busy and made this work.”
BH Specialty now writes 60% of the primary layer of “claim bill” coverage for the nation’s second-largest public hospital.
“If it had been a new market with great leadership, it would be a question mark,” Stratos says. “If it were Berkshire but without the leadership, it would be a question mark. But put Warren Buffett and Berkshire behind a management team you know and trust, and the barriers dissolved.”
BH Specialty started with instant cachet, in large part because of the success its founders experienced at what is now one of its most formidable competitors.
In late April 2013, Eastwood, who headed AIG’s property-casualty operations for all of the Americas, left the employer that had hired him right out of college 22 years earlier, along with his colleagues David Bresnahan, former president of Lexington Insurance, AIG’s excess and surplus lines company; David Fields, former president of AIG Global Casualty; and Sanjay Godhwani, former president of AIG’s p-c business in Latin America and the Caribbean. Several other AIG executives followed. Today the 95 employees in BH Specialty’s commercial insurance business hail from 34 different companies.
Without being frenetic, things at BH Specialty move at an incredibly fast pace. Three months after employees moved into the New York office, workers were breaking through walls to expand the space.
By the second day of the company’s third week, BH Specialty wrote its first policy. Almost a year in, underwriters had reviewed 8,300 submissions and sold policies to more than 600 customers.
“There is just this phenomenal momentum,” Spoon Rafkin says.
While he’s getting to know the fast-growing staff and tending a carefully cultivated culture, Eastwood is also mining for opportunities, trying to find ways in a flush market to best deploy a mass of capital that is unheard of for an insurance start-up. Berkshire Hathaway’s National Indemnity group of companies—the paper BH Specialty uses—has upwards of $117 billion in policyholder surplus, around 15% of the total capacity of the U.S. p-c industry.
It’s a once-in-a-lifetime opportunity for Eastwood and his team, but there’s no denying the challenge it presents. In the letter accompanying Berkshire Hathaway’s 2013 annual report, the Oracle of Omaha told investors BH Specialty would generate billions of dollars of premium within a few years.
“So, you read that?” Eastwood asks with a laugh.
In a statement emailed to Leader’s Edge, Buffett noted that, while Berkshire Hathaway has long had a significant presence in reinsurance and a “star performer” in personal lines with Geico, “in the direct commercial property-casualty business, we have not developed a large, global player among our units,” he said. “Now that we have a quality team led by an outstanding manager like Peter, our goal over time is to have Berkshire Hathaway Specialty—with a very different business model, to be sure—grow to become the Geico of the commercial marketplace.”
Talk about pressure.
When Berkshire bought it in the mid-1990s, Geico had less than 3% of the market; last year it surpassed Allstate to become the second-largest auto insurer. Before the launch of BH Specialty, Berkshire Hathaway ranked 20th in the U.S. surplus lines industry, writing just 1.2% of a $38.8 billion market, according to A.M. Best Co.
Industry observers are keen to see just how Eastwood and his team will navigate the market, especially given the proclivity of their boss to use capital opportunistically.
Ajit Jain, Berkshire Hathaway’s reinsurance chief, has eliminated most of Berkshire’s U.S. catastrophe business because rates are too low. But Fortune 500 companies won’t buy from insurers that are in one year and out the next.
“Building out the infrastructure to execute the business in the manner in which customers and brokers would expect is one challenge,” says Jeremy Goodman, executive vice president with reinsurance brokerage Aon Benfield. “The other is being able to go out and source for the business that Berkshire Hathaway wants in order to deliver the profitability that Berkshire Hathaway demands.”
In a market with too much capacity, Berkshire’s huge balance sheet is both a blessing and a burden.
“Ajit Jain gives Peter the opportunity to execute without being micromanaged,” says Warren Mula, CEO of Aon Broking. “That’s good, but it’s also scary.”
Given his demeanor—cool, calm and serious—the 47-year-old Eastwood betrays not a lick of stress about the challenge of fulfilling Buffett’s ambitions.
“Listen, we have big expectations. So I want us to do more and I want us to do it as quickly as we possibly can,” Eastwood says. “I don’t want us to sacrifice thoughtfulness in the process and to rush through it to the point where the singular focus becomes simply growing the business.”
Compared to the trial by fire that Eastwood endured at AIG, this gig is a walk in the park. Stratos, the Florida hospital executive, was visiting Lexington’s Boston headquarters to discuss a renewal with Eastwood on the mid-September day in 2008 when AIG crashed. At that moment, no one knew if the once-stalwart insurer would be in business long enough to close the deal, let alone pay any claims. American taxpayers rescued AIG from financial ruin, but executives were struggling to save its reputation when four months later another aftershock jolted the insurer into crisis: Kevin Kelley, who built Lexington into a $6 billion powerhouse over a 33-year career, left for Ironshore, a year-old Bermuda start-up. A succession of other top AIG people followed, including Kelley’s presumed successor.
Eastwood was on a business trip to Houston when he was asked to lead Lexington. After a moment of shock, he said yes. Saving the crown jewel of AIG “would require dueling sides of Eastwood’s personality,” Leader’s Edge reported in April 2011. “He had to be both Mother Teresa and Machiavelli.”
Eastwood used clear, honest communication to erase the doubts of top managers and employees and to assure clients around the world that the leadership was stable and Lexington’s claims-paying ability secure. Bresnahan and Godhwani played important roles in righting the ship, and the experience not only cemented the bonds among them but set the stage for the kind of culture they are creating at BHSI.
That Christmas, Eastwood sent hundreds of holiday cards to employees, telling them how important they were to the organization. He carried the tradition to BH Specialty. In addition to a handwritten note, every employee received a company sweatshirt personalized with his or her employee number inscribed on the sleeve.
Eastwood calls each employee on their first day of work. “It’s not a call saying, ‘Thanks for joining us; I’m the boss,’” says Dan Fortin, a CNA veteran who signed on last June (employee No. 33) to be senior vice president for executive and professional lines. “It’s 15, 20, 25 minutes of, ‘Tell me about your background, your family, your career aspirations.’”
Eastwood traces his appreciation for hard work to his schoolteacher parents in Warwick, R.I. Lacking direction after high school, he spent two years working in a warehouse, driving a truck and operating a forklift.
“It wasn’t necessarily a desirable or sought-out option, but it was what I had available to me at the time,” he says. “The value of that experience was the opportunity to mature a bit. And it also gave me a sense of what I didn’t want to do.”
Armed (eventually) with a bachelor’s degree in economics from Ohio Wesleyan University, Eastwood entered the job market in the 1991 recession. He found a job at AIG as a management trainee in the directors-and-officers liability department, guided there by Tom Ruggieri, a family friend who was an Ohio Wesleyan trustee and a D&O broker at Marsh.
“On day one, they called me and said, ‘Wow, this kid is really with it,’” Ruggieri says.
AIG came to feel like home.
Every fiber of AIG culture bore the indelible mark of Maurice “Hank” Greenberg, the legendary chairman who was ultimately forced to resign from the financial behemoth he built. Eastwood admired Greenberg’s willingness to work harder than everybody else to make the organization successful.
“AIG under Mr. Greenberg’s leadership was in many ways a white-collar organization—in terms of the business that it did—with blue-collar people, people who recognized the value of hard work,” Eastwood says. “That was a very good fit with my upbringing.”
What Eastwood doesn’t say but has long been acknowledged is this: Greenberg used fear to drive success. His temper was legendary, as was his tendency to pit executives against one another.
Eastwood’s calm composure conceals a fierce competitive streak, so it’s no surprise that he could thrive in a cutthroat culture. At BH Specialty, however, he is taking great pains to create something different. Eastwood doesn’t just write about teamwork in his monthly missives; he invites employees from different parts of the company to lunch and forces them to talk about how they can help each other.
As an underwriter, Eastwood worked hard to earn the trust of brokers and clients. If a claim dispute looked like it was going to turn ugly, he strove to preserve the relationship without giving away the store.
“Being on the broker side of the fence, we don’t always agree, but I’ve always admired the fact that he tries to understand the totality of the problem, and if the answer isn’t black and white, he is a man who is not averse to compromise,” says Mula, of Aon Broking. “For an underwriter, I don’t want to say it’s rare, but it’s not the first inclination.”
Balance Sheet Act
Stratos, by her own admission, is a demanding client. She took measure of Eastwood’s character the first time they met, when she expressed, in no uncertain terms, her displeasure with a renewal quote. He listened carefully, then explained exactly why her hospital was underwritten the way it was.
“There is a lot of head-nodding when insurance executives talk to clients, but do they really listen?” she says. “He was extremely direct. He epitomized the person who believes the buck stops here.”
At BH Specialty’s first customer advisory board meeting in November, Eastwood peppered members with questions, trying to flesh out their thoughts on which products and services should be priorities for his still-small staff. “Peter really put that board together because he wants it to help him make decisions,” Regan says.
Right now, the company offers five product lines—property, casualty, executive and professional lines, healthcare liability and program business—to large commercial customers in the United States. This year, the company will expand overseas, beginning in Europe and Asia. The recent purchase of MyAssist, a personal assistance and telematics business with a strong customer service platform, sets the stage for a future in the small business and consumer markets.
Given Berkshire’s balance sheet, the talent BH Specialty has amassed, and the global infrastructure it plans to build, no one doubts it can grow into a substantial market player fairly quickly. Doing so while delivering returns that meet Buffett’s exacting standards may be harder. If Eastwood doesn’t seem worried, it’s because no other investor in recent history has taken a longer view than Buffett.
“He’ll say, ‘50 years from now I want people to say Berkshire Hathaway has the finest property and casualty insurance organization in the world,’” Eastwood says. And that foresight, he says, “gives you a luxury when you are building a business.”
One of the other luxuries of starting a business with Buffett’s money is the opportunity to rub shoulders with him. In November, Buffett and Jain met with six BH Specialty executives for 90 minutes. At a cocktail party later that day, Buffett engaged with anyone who wanted to chat, snap a photo or share a joke. “Then he spent about 90 minutes answering non-staged questions candidly and brilliantly,” Stratos says.
When all is said and done, Warren Buffett’s celebrity won’t carry the day for Berkshire Hathaway Specialty Insurance. Eastwood and his team will be judged on their commitment to the market and their reputation for paying claims.
“Conceptually, it’s a great story,” says Regan. “We’ll need to watch and make sure that the reality meets the story.”