Buffett reduces shareholding in reinsurance firm Munich Re

Warren Buffett’s Berkshire Hathaway Inc. and National Indemnity Company have reduced their shareholdings in reinsurance firm Munich Re to 9.7%. Previously, the two firms held around 12% of the share capital of Munich Re.

The two companies, directly or indirectly owned by Buffett, have held more than 10% of the shares in Munich Re since October 2010. Buffett said at the time that the investment was being held for the purpose of generating trading profits.

The wider financial press is certain to jump on this as a further sign that Warren Buffett doesn’t like reinsurance anymore. However, this may be a sign of his firm’s intention to diversify further away from insurance and reinsurance businesses, as it is clearly not the profit driver it was five years ago for Berkshire Hathaway’s profits.

Despite that, it is worth remembering that Berkshire is still among the largest reinsurance and insurance group’s in the world and that the re/insurance business is still Buffett’s core driver of float. Deals such as Berkshire’s investment and quota share with Australian insurer IAG are evidence of the fact that re/insurance does have a continued attraction for Buffett, just perhaps not in the same way as five years ago.

As the reinsurance market has structurally changed and insurance seems to be adjusting to, in the wake of interest from new entrants, investors such as pension funds, the growth of ILS and the collateralized product and a drive for efficiency in capital and risk transfer, re/insurance has changed and may not hold the same attraction it once did for Berkshire.

It’s also worth noting that Buffett reducing his stake is actually not a bad thing at all for Munich Re.

Reducing a major shareholding to a lower amount frees up equity for other investors, providing better diversification among the shareholder base for the reinsurance firm.

Jörg Schneider, Chief Financial Officer of Munich Re, commented; “We are pleased that Warren Buffett has been a significant shareholder for many years. In the 135-year history of our business, we have often seen changes to our shareholder structure. Most of our shareholders now come from countries other than Germany, and the percentage of private investors has increased strongly. Most of our shareholders are long-term investors who have been with us for years. In the future, we will also ensure that our shareholder community remains spread over many countries and different investor groups.”

This is perhaps a good time for Buffett to reduce this shareholding. Berkshire is certainly seeking to become more diversified within its re/insurance business and that will also likely lead to more capital being deployed outside of the re/insurance sector too.

As Berkshire Hathaway has moved more into specialty lines as well, and Munich Re has been growing its focus on customised, large commercial re/insurance solutions, the two firms will increasingly come up against one another as competitors as well, so perhaps this is another reason for the reduction in stake at this time.

But it’s certain that insurance and reinsurance will continue to be the “engine of Berkshire Hathaway”, as Buffett himself once said. Just perhaps not in exactly the same way as it used to be.

Also read:

– Buffett bemoans reinsurance becoming a “fashionable asset class”.