After his surprise move into US railways late last year with the $26.6bn purchase of rail operator BNSF, Warren Buffett is expanding his presence in the reinsurance industry — a sign, say some analysts, that he is calling the bottom in reinsurance stock prices.
As the FT reports on Wednesday, Buffett’s Berkshire Hathaway has become one of the largest shareholders in industry giant Munich Re, building a stake worth €660m ($934m) in the German reinsurer, according to a market announcement triggered when his stake rose above 3 per cent.
That makes Buffett the second-largest investor in Munich Re, after US asset manager BlackRock with almost 4.6 per cent.
So has the reinsurance market bottomed?
One brave analyst, Jonathan Hekster, at Bernstein Research, told the FT: “I would hate to go against one of the world’s most respected investors, but I think it’s probably a little early for that.”
One thing is clear. Buffett loves the reinsurance industry, Berkshire being the world’s third-largest reinsurer. On Munich Re, Hekster points to parallels with Buffett’s investment in its biggest European rival, Swiss Re, which also increased after he bought a 3 per cent stake in 2008.
Berkshire now has a deal to secure a stream of business from Swiss Re and just this month bought a block of US life assurance from the company, having provided it last year with SFr3bn ($2.9bn) of debt funding convertible into equity.
Perhaps more will be revealed about Buffett’s rationale next week, when Munich Re - the world’s biggest reinsurer in terms of gross written premiums — reports preliminary results for 2009. From early indications, it is expecting a healthy rise in net income to between €2.2bn and €2.5bn, against €1.5bn in 2008.
On another Sage-related front, Standard & Poor’s said on Tuesday it would add Berkshire to its flagship S&P 500 index, as the group prepares to complete its acquisition of US rail operator BNSF.
As MarketBeat remarked:
Forty-four years after Warren Buffett took control Berkshire Hathaway, his conglomerate has finally hit the big time.
Investors seemed to like the news, driving Berkshire’s Class B shares up $5.40, or 7.9 per cent, to $73.40 after the announcement. Berkshire’s Class A shares rose 8.1 per cent to $110,000.
As the FT explains, S&P’s move follows Berkshire’s 50-for-1 split last week of the B shares, to make it easier for Burlington Northern shareholders to exchange their stock for Berkshire shares in a tax-free swap, rather than accept cash. Berkshire will replace BNSF in the S&P500 and the S&P100 index.
S&P decided to move now because few other large companies other than Burlington are scheduled to be taken out of the index later this year, David Blitzer, chairman of S&P’s index committee, told the Wall Street Journal on Tuesday.
In addition, he said, Burlington shareholders are scheduled to vote on the Berkshire offer in coming weeks. The pricing period to set the exchange rate of Berkshire for Burlington shares comes several trading days before the vote — so the committee had to act quickly to avoid any impact on the exchange rate during the pricing period.
After its inclusion, Berkshire, the biggest US company not in the index, will account for about 1.1 per cent of the S&P 500′s overall market cap, and will be the 21st largest company in the index.
As MarketBeat added: “Hey rookie, welcome to the show…”
Related links:
John Gapper: Omaha’s sage makes all-in bet on BNSF – FT
Times Topics: Warren E. Buffett – NYT
Berkshire nears smaller baby Bs – WSJ
Kradbury: a ‘bad deal’ - FT Alphaville