Warren Buffett continues to dial back on reinsurance

by Artemis on December 14, 2015

Warren Buffett has again reduced his investment in the reinsurance industry by cutting his share holdings in the world’s largest reinsurer Munich Re, as the ‘Sage of Omaha’ continues to dial back on his firm Berkshire Hathaway’s interest in reinsurance underwriting.

Much has been written in 2015 about Warren Buffett’s opinion of the reinsurance sector and the prospects for reinsurance underwriting returns in the future.

Despite having previously called insurance and reinsurance the “engine” of Berkshire Hathaway’s growth and continuing to invest heavily in his primary insurance businesses, Buffett has pulled back on underwriting property catastrophe risks and reduced his exposure to reinsurance pricing more generally.

In September Buffett reduced the shareholdings in Munich Re that his firms Berkshire Hathaway Inc. and National Indemnity Company held, from 12% to around 9.7% of the reinsurer.

Now, according to a report from Reuters, Buffett has reduced the holdings in Munich Re down to just 4.6%.

However, no matter how much Buffett dials back his direct investments in reinsurance, his firm Berkshire Hathaway continues to supply large amounts of reinsurance capital both through the syndicated market and through arrangements such as its investment in Australian insurer IAG.

Buffett is also breaking down the risk -> insurance -> reinsurance value chain, through initiatives such as the recently AA+ rated Berkshire Hathaway Direct Insurance Co., which will sell commercial policies, such as workers compensation and business owners’ package covers, online directly to buyers.

Some commentators have suggested that this direct online commercial platform could sell commercial property in future, which could be disruptive to the parts of the market which are more standardised and able to be transacted online.

Given its scale, Berkshire Hathaway does not need to cede much of the risk it writes back to reinsurers, not requiring protection of its own, so by writing commercial business direct and retaining the majority of the risk, Buffett is effectively reducing the costs that would have been associated with sourcing risk in the traditional syndicated and broker-led reinsurance marketplace.

So the appetite for assuming risk does not seem diminished at Berkshire Hathaway. One only has to look at the specialty business, the regular launches of new teams, lines of business and offices, to see an expansive approach to acquiring risk.

What does seem to have declined is Warren Buffett’s appetite to participate in the traditional syndicated, renewal driven, reinsurance market.

But then if you look closely at the strategies of companies like Munich Re and Swiss Re, which are increasingly sourcing risk more directly from their corporate and commercial focused large insurance transaction arms, or at the ILS manager space where players are consistently trying to move up the value-chain to get closer to the source of primary risk, it seems everyone is following suit.

In a cyclical business like reinsurance, companies will cycle in and out or find more efficient ways to achieve the same end-goal, of underwriting and assuming risk. At this point in the cycle reducing a share position in one of the largest reinsurers, when you can source similar risks yourself more efficiently anyway, seems a sensible and not unexpected strategy from Buffett.

Also read:

Berkshire Hathaway demonstrates flexibility of Buffett model.

Buffett reduces shareholding in reinsurance firm Munich Re.

Berkshire Hathaway copycats will pressure reinsurance pricing: S&P.

Buffett bemoans reinsurance becoming a “fashionable asset class”.

Re/insurance. The engine of Berkshire Hathaway: Warren Buffett.

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