Markets

Warren Buffett Sours on Reinsurance; Here's What He Did

U.S. stocks are posting decent gains on Wednesday, with the Dow Jones Industrial Average and the S&P 500 up 0.85%, and 1.06%, respectively, at 12:30 p.m. EDT.

Image source: 30 St Mary Axe, the London HQ of Swiss Re. Photograph © Andrew Dunn. Reproduced under a Creative Commons license .

Berkshire Hathaway CEO Warren Buffett isn't impressed with the prospects for the reinsurance industry so he's reallocating some of Berkshire's precious capital to reflect that. Yesterday, Munich Re , the world's largest reinsurer, disclosed in a statement that Berkshire Hathaway and its subsidiary National Indemnity Company have reduced their combined shareholding from roughly 12% to 9.7%. Berkshire remains Munich Re's largest shareholder.

At this year's Berkshire Hathaway annual meeting, Buffett described a dour outlook for reinsurers:

It's a business whose prospects have turned for the worse and there's not much we can do about it. [Over the next ten years, the reinsurance industry in the next 10 years] will not be as good as it has been in the last 30.

Buffett explained his prognostication:

It has become a fashionable asset class as funds are looking for uncorrelated risks. People may not know what they're getting into. It is also being used as a vehicle for hedge funds -- using the facade of reinsurance to cover their real motivation [for obtaining a tax-advantaged status offshore]. This has led to less attractive prices.

Reinsurers are being caught between two adverse trends, both of which are linked to the historically low interest rate environment in the aftermath of the financial crisis. On the one hand, a flood of new capital seeking out new, uncorrelated sources of return has hurt pricing and, on the other, reinsurers are struggling to earn a return on their investments in a yield-starved world.

This didn't happen overnight. Two years ago, Manfred Seitz, managing director of international reinsurance at Berkshire Hathaway, told a roundtable of reinsurance industry executives that "prices in a number of areas are below where they should be. It's a buyers' market: There is a large number of providers and a lot of capital looking for returns."

Berkshire Hathaway itself has a substantial reinsurance business, of course, but Buffett was able to provide some comforting news to shareholders at last May's meeting, emphasizing that "there are certain things in the reinsurance market that only Berkshire can do." To back that up, he said Berkshire had written eight reinsurance contracts with premiums exceeding a billion dollars -- no-one else in the industry had written any.

Because they are, to quote Berkshire Vice-Chairman Charlie Munger, "playing the game for the long pull" and practice extreme discipline with regard to pricing, reinsurance will remain a profitable activity for Berkshire Hathaway. For the rest of the industry, however, it appears the buffeting will continue.

This $19 trillion industry could destroy the Internet

One bleeding-edge technology is about to put the World Wide Web to bed. And if you act quickly, you could be among the savvy investors who enjoy the profits from this stunning change. Experts are calling it the single largest business opportunity in the history of capitalism... The Economist is calling it "transformative"... But you'll probably just call it "how I made my millions." Don't be too late to the party -- click here for one stock to own when the Web goes dark.

The article Warren Buffett Sours on Reinsurance; Here's What He Did originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More