Buffett has more than $4.5 billion invested in Munich Re and Swiss Reinsurance Co
Warren Buffett, who cut back sales of protection to insurers because prices were too low, is betting on a rate increase by investing in the only two firms to write more reinsurance than his Berkshire Hathaway Inc.
Buffett has more than $4.5 billion invested in Munich Re and Swiss Reinsurance Co., choosing to put Berkshire’s cash in two companies that account for more than a third of the global market instead of using the money to compete against them. Had Buffett, as Berkshire’s chairman and chief executive officer, directed a part of that capital to his own underwriters, he could have pushed down the price of coverage, analysts said.
“This is a move to increase that exposure without disrupting the pricing,” said Craig Fehr of Edward Jones & Co., who has a “hold” rating on Omaha, Nebraska-based Berkshire’s stock. “It’s likely a reflection of the fact there aren’t an abundance of opportunities to write new business.”
Buffett’s biggest takeovers in the last decade have boosted Berkshire’s energy and freight businesses, reducing his company’s reliance on insurance. Two years ago, he warned of an industry slump after underwriting results slipped from a record. “That party is over,” Buffett wrote in his 2007 letter to investors, and Berkshire’s underwriting profits have since slipped about 60 percent.
The 2009 letter is scheduled to be released tomorrow with fourth-quarter results. Meyer Shields, an analyst with Stifel Nicolaus & Co., expects Berkshire to post net income of $1,354 a share, compared with $76 in the year-earlier period, according to Bloomberg data. Berkshire stock has risen 23 percent since the end of 2008 as Buffett purchased railroad Burlington Northern Santa Fe for about $27 billion in his largest takeover.
Appetite for Risk
Berkshire, which sells protection through General Re and Berkshire Hathaway Reinsurance Group, scaled back on the coverage of large risks to conserve capital in the first half of last year. The company said in August it had recovered its appetite for new business, while adding it would wait to increase sales until prices improved.
The price for catastrophe reinsurance fell for the third time in four years when insurers renegotiated their annual contracts on Jan. 1, according to Guy Carpenter & Co., a unit of brokerage Marsh & McLennan Cos. Prices typically fall when the economy declines, as companies have less to insure. Rates also slide when an increase in industry capital gives carriers the capacity to sell more protection than the market needs.
Reinsurer capital rose in 2009 as stock and bond market rallies boosted investments and the quietest Atlantic storm season in more than a decade reduced claims costs. In 2008, catastrophes including Hurricanes Ike and Gustav cost property insurers $52.5 billion worldwide, according to a Swiss Re study.
“We’ve seen a global easing of rates in the reinsurance market,” said Bryon Ehrhart, CEO of Aon Benfield Analytics, the reinsurance arm of Aon Corp., the world’s largest insurance broker. “There’s never been more capital in the reinsurance business than there is now.”
Selling another $1 billion of coverage through General Re in today’s market would be “quite difficult” for Buffett, Ehrhart said. Still, he doubted that the amount Buffett put into Munich Re would be enough to influence prices if directed to Berkshire’s underwriters instead. Buffett didn’t respond to a request for comment left with an assistant.
Buffett’s strategy of spreading Berkshire’s capital across the top three reinsurers contrasts with his usual approach of investing in single companies that stand out in their respective industries. Buffett has said he likes to invest in companies, like Coca-Cola Co. and American Express Co., where he sees lasting competitive advantages, or what he calls “moats,” that may help firms outperform rivals.
Buffett’s Brand Loyalty
“For his large investments, he seems to be pretty loyal to that one company in that industry that he invests in,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “He has a large stake in Coca- Cola, of course, and doesn’t as far as I know own any shares in PepsiCo. He has a large stake in American Express, and as far as I know has no investment in Visa or MasterCard.”
Buffett’s diversification in reinsurance came as he narrowed his focus in railroads. Berkshire took stakes in three of the biggest U.S. haulers of freight before announcing last year the takeover of Burlington Northern and selling holdings in the other two. A buyout of one of Berkshire’s reinsurance rivals is less likely, analysts said, because clients would probably resist.
“There’s no way they could do something strategic, given their own position,” said Tim Dawson, a Geneva-based analyst at Helvea SA. In a merger among top reinsurers, “the loss of business would be quite substantial. If you’re an insurance company, you want to diversify your reinsurance coverage” to reduce the impact of one carrier being unable to meet its obligations after a major disaster, he said.
Berkshire’s profits from underwriting dropped to $665 million in the first nine months of 2009, compared with $1.72 billion two years earlier. Underwriting profit is the amount of premium left after a carrier pays claims and expenses. Insurers also record income by collecting dividends and bond coupons on investments they make with policyholder funds before the money is needed to pay claims.
Reinsurers, which served as “bankers of last resort” for insurers when capital was scarce in the 1990s, may again find greater demand amid European regulatory changes, according to Duncan Russell, Michael Huttner and other analysts at JPMorgan Chase & Co. The reform, known as Solvency II, will increase capital standards in coming years, pushing carriers to share more risks with reinsurers, the analysts said in a January report.
Buffett built Berkshire into a $190 billion company by investing premiums from insurance units into businesses ranging from ice cream and underwear to energy production. Berkshire’s accumulated premium, or “float,” totaled about $62 billion at the end of September.
Berkshire’s Swiss Re holdings, dating from a 3 percent stake disclosed in January 2008, have been accompanied by risk- sharing deals that helped increase Berkshire’s float. Buffett’s firm has assumed 20 percent of Swiss Re’s property-casualty business for five years, and last month Berkshire bought a block of life reinsurance from its rival.
Swiss Re also got an injection of 3 billion Swiss francs ($2.78 billion) from Berkshire in 2009. The securities he purchased in the private deal pay Berkshire a 12 percent coupon, and may hand Buffett’s firm more than 20 percent of Swiss Re’s common stock if the reinsurer doesn’t make a full repayment by 2012.
“The clear first priority is to redeem Berkshire,” said CEO Stefan Lippe on a conference call Feb. 18 about his use of the firm’s cash. “My next share buyback is Berkshire.”
Berkshire’s 5.1 percent stake in Munich Re, disclosed this year in multiple steps, came without any risk-sharing deals and therefore won’t boost the amount that Buffett has available to invest. Johanna Weber, a spokeswoman for Munich Re, said this week the company “welcomes any investor.”
Berkshire makes about 360 million Swiss francs a year from the interest it collects from its Swiss Re coupons and will get an annual dividend of more than 57 million euros ($77 million) from Munich Re this year, based on the 5.75-euro per-share dividend the company announced on Feb. 2. The stake in Munich Re, which is based in the German city of the same name, is valued at about 1.1 billion euros.