By Anupreeta Das And Leslie Scism 

The obscure business of reinsurance has always been one of Warren Buffett's favorite money makers, but a changing landscape has led his Berkshire Hathaway Inc. to adjust its strategy.

Reinsurers assume other insurance companies' risk, and Berkshire has long generated fat profits in the sector to help fuel its growth. But over the past few years, a host of new competitors--mostly pension funds seeking higher-yielding alternatives to conventional bond holdings--have piled in, pushing down some reinsurance prices and prompting some companies to pursue deals to bolster their defenses.

On Wednesday, insurer ACE Ltd. agreed to buy Chubb Corp. for $28.3 billion in a sign the pressures are spilling over into the broader insurance industry. Analysts expect other mergers ahead.

Berkshire is pivoting toward parts of the insurance industry it feels look more promising than reinsurance, putting the company in the unfamiliar role of upstart.

"What was a very lucrative business is no longer a very lucrative business going forward," Ajit Jain, a longtime top lieutenant to Mr. Buffett and a potential candidate to succeed him as chief executive, said in an interview. Berkshire will pursue reinsurance deals when they make sense, he said. "But since the reinsurance business isn't going to offer as many opportunities for the foreseeable future, we feel like we should go down the food chain."

Mr. Jain, 63 years old, has spent the past two years overseeing the launch of a commercial-insurance unit that sells specialized coverage to businesses. The unit is among the top 10 players in the sector, according to SNL Financial.

Last month, Berkshire agreed to buy a stake in a major Australian insurer to gain access to business clients in Asia. By next year, Berkshire plans to sell insurance to small and medium-size businesses directly over the Internet, bypassing the industry's middlemen.

Mr. Buffett has always liked insurance because buyers--be they car owners, businesses or insurance companies--pay premiums upfront, while claims often can be paid out much later. Berkshire is able to invest the funds for its own benefit in the interim. Mr. Buffett calls these funds "float."

Along with underwriting profits, float is what helped fund Berkshire's expansion and diversification into dozens of businesses. The Omaha, Neb., company owns utilities, housing manufacturers, a candy company and a railroad.

The growth of Berkshire's reinsurance business is largely attributed to Mr. Jain, who joined Berkshire in 1985. Under Mr. Jain--born in India, with a master's degree from Harvard Business School--Berkshire built a reputation for taking on large and unusual risks from other insurance companies, like asbestos or earthquake exposure in policies those insurers had sold to businesses and individuals. Other reinsurers often were unwilling or unable to compete because they didn't have balance sheets as big as Berkshire's. That meant Berkshire could charge a hefty price.

Last year, Mr. Jain's Berkshire Hathaway Reinsurance Group, which is one of Berkshire's two reinsurance units, generated roughly half of Berkshire's $84 billion in float, and it is one of the world's largest reinsurers by assets.

But at Berkshire's annual meeting in May, Mr. Buffett said the reinsurance business has taken a turn for the worse and will be less attractive over the next decade, compared with the past 30 years, as new sources of capital flow in.

Last year, the amount of money plowed into the reinsurance industry by newer investors such as pension funds jumped 28% to $64 billion, according to reinsurance broker Aon Benfield. That helped bring global reinsurance capital, an industry term for the amount of money the industry collectively holds over and above the amount reinsurers estimate is needed for claims, to $575 billion.

Some of that investor cash is going into what are known as catastrophe bonds. These securities help insurers pay for claims after a hurricane or other catastrophe and allow them to tap the capital markets as a lower-cost alternative to reinsurance.

All this new money is creating competition that limits what reinsurers can charge for coverage. Yet brokers expect more cash to arrive from pension funds, which are satisfied with far-lower returns than reinsurers are used to earning, brokers say.

Analysts at insurance-industry research firm Dowling & Partners recently wrote that Mr. Jain's strategy of reinsuring against catastrophes has been the "biggest loser" because of the flood of capital. Premiums written by Mr. Jain's group slipped 2% in the first quarter. At General Re, another reinsurer owned by Berkshire, premiums written for property and casualty reinsurance fell 16% in the first quarter of 2015 compared with the year-earlier period.

Berkshire noted in its quarterly report that its volume continues to be "constrained" because rates are "inadequate" but that it has the "capacity and desire to write substantially more business when appropriate pricing can be obtained."

Barclays PLC analyst Jay Gelb said Berkshire's big move into commercial insurance rounds out the conglomerate's offerings. Commercial insurance "seems to be a better long-term opportunity now than reinsurance in the next decade," Mr. Gelb said.

"It's fundamentally a good business that we probably should have developed earlier," Mr. Buffett said in an interview.

Berkshire already owns Geico, a car insurer that sits behind No. 1 State Farm in market-share rankings and which helped pioneer Internet sales in the insurance industry. But it sold little insurance to commercial customers until starting up Berkshire Hathaway Specialty Insurance in 2013. People familiar with the company expect Berkshire Hathaway Specialty to generate more than $5 billion in float within a decade. Based in Boston, the specialty-insurance business was started by former American International Group Inc. executives. It now employs about 600 people and has offices in six countries.

Insurance brokers said the unit is taking market share from smaller insurers. M. Steven DeCarlo, chief executive of insurance broker AmWINS Group Inc., said he goes to Berkshire's new unit if a client needs an especially large policy. He said insurance buyers feel secure dealing with a company as financially strong as Berkshire.

Berkshire's other big initiative is a planned move into online insurance. To be called Berkshire Hathaway Direct, it will target small and midsize businesses. Traditionally, insurers have relied on agents and brokers to sell their products, but Mr. Jain is taking a page out of the Geico direct-to-consumer playbook, convinced the industry is ripe for disruption from this effort.

"I wouldn't play it in any other way than we're playing it," Mr. Buffett said.

Write to Anupreeta Das at anupreeta.das@wsj.com and Leslie Scism at leslie.scism@wsj.com

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