By Andrew Frye and Oliver Suess <\/p>\n
Feb. 26 (Bloomberg) — 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.<\/p>\n
Buffett has more than $4.5 billion invested in Munich Re and Swiss Reinsurance Co., choosing to put Berkshire\u2019s 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\u2019s 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.<\/p>\n
\u201cThis is a move to increase that exposure without disrupting the pricing,\u201d said Craig Fehr of Edward Jones & Co., who has a \u201chold\u201d rating on Omaha, Nebraska-based Berkshire\u2019s stock. \u201cIt\u2019s likely a reflection of the fact there aren\u2019t an abundance of opportunities to write new business.\u201d<\/p>\n
Buffett\u2019s biggest takeovers in the last decade have boosted Berkshire\u2019s energy and freight businesses, reducing his company\u2019s reliance on insurance. Two years ago, he warned of an industry slump after underwriting results slipped from a record. \u201cThat party is over,\u201d Buffett wrote in his 2007 letter to investors, and Berkshire\u2019s underwriting profits have since slipped about 60 percent.<\/p>\n
Appetite for Risk<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cDue to the restoration of net worth that occurred during the second quarter, management\u2019s willingness to write large catastrophe risks has increased, but to date rates have not warranted such writing,\u201d Berkshire said in a regulatory filing.<\/p>\n
Catastrophe Coverage<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cWe\u2019ve seen a global easing of rates in the reinsurance market,\u201d said Bryon Ehrhart, CEO of Aon Benfield Analytics, the reinsurance arm of Aon Corp., the world\u2019s largest insurance broker. \u201cThere\u2019s never been more capital in the reinsurance business than there is now.\u201d<\/p>\n
Selling another $1 billion of coverage through General Re in today\u2019s market would be \u201cquite difficult\u201d 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\u2019s underwriters instead. Buffett didn\u2019t respond to a request for comment left with an assistant.<\/p>\n
Buffett\u2019s Brand Loyalty<\/p>\n
Buffett\u2019s strategy of spreading Berkshire\u2019s 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 \u201cmoats,\u201d that may help firms outperform rivals.<\/p>\n
\u201cFor his large investments, he seems to be pretty loyal to that one company in that industry that he invests in,\u201d said David Kass, a professor at the University of Maryland\u2019s Robert H. Smith School of Business. \u201cHe has a large stake in Coca- Cola, of course, and doesn\u2019t 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.\u201d<\/p>\n
Valuing Diversity<\/p>\n
Buffett\u2019s 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\u2019s reinsurance rivals is less likely, analysts said, because clients would probably resist.<\/p>\n
\u201cThere\u2019s no way they could do something strategic, given their own position,\u201d said Tim Dawson, a Geneva-based analyst at Helvea SA. In a merger among top reinsurers, \u201cthe loss of business would be quite substantial. If you\u2019re an insurance company, you want to diversify your reinsurance coverage\u201d to reduce the impact of one carrier being unable to meet its obligations after a major disaster, he said.<\/p>\n
Berkshire\u2019s 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.<\/p>\n
Flotation Device<\/p>\n
Reinsurers, which served as \u201cbankers of last resort\u201d 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.<\/p>\n
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\u2019s accumulated premium, or \u201cfloat,\u201d totaled about $62 billion at the end of September.<\/p>\n
Berkshire\u2019s Swiss Re holdings, dating from a 3 percent stake disclosed in January 2008, have been accompanied by risk- sharing deals that helped increase Berkshire\u2019s float. Buffett\u2019s firm has assumed 20 percent of Swiss Re\u2019s property-casualty business for five years, and last month Berkshire bought a block of life reinsurance from its rival.<\/p>\n
Swiss Re<\/p>\n
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\u2019s firm more than 20 percent of Swiss Re\u2019s common stock if the reinsurer doesn\u2019t make a full repayment by 2012.<\/p>\n
\u201cThe clear first priority is to redeem Berkshire,\u201d said CEO Stefan Lippe on a conference call Feb. 18 about his use of the firm\u2019s cash. \u201cMy next share buyback is Berkshire.\u201d<\/p>\n
Berkshire\u2019s 5.1 percent stake in Munich Re, disclosed this year in multiple steps, came without any risk-sharing deals and therefore won\u2019t boost the amount that Buffett has available to invest. Johanna Weber, a spokeswoman for Munich Re, said this week the company \u201cwelcomes any investor.\u201d<\/p>\n
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.<\/p>\n
–With assistance from Jamie McGee in New York. Editors: Erik Holm, William Ahearn<\/p>\n
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