The Oracle of Omaha snaps up 3% of the world's largest reinsurer, sending shares up, and leaving analysts scratching their heads
Warren Buffett, the veteran Nebraska investor revered as the Oracle of Omaha, has come riding to the rescue of Swiss Re, the world's largest reinsurance company. Mr Buffett's Berkshire Hathaway which owns General Re, one of Swiss Re's two biggest rivals has taken a 3 per cent stake in the Zurich-based giant and will take over a large chunk of its future business.
The agreement frees up money that Swiss Re says it needs for share buy-backs, one of the only things propping up the share price since the company became embroiled in the sub-prime mortgage market meltdown. It also cements Mr Buffett's position as one of the big winners from the credit crisis.
Swiss Re has lost more than a quarter of its value since saying in November that it would take a SFr1.2bn (£560m) writedown on insurance for complicated mortgage derivatives. Many of these derivatives have collapsed in value as US homeowners have begun defaulting on their mortgages in record numbers.
Berkshire Hathaway will take a fifth of all premiums from Swiss Re's property and casualty insurance over the next five years, in return for taking on a one-fifth share of the risk. Consequently, Swiss Re can reduce its reserves, freeing up SFr1.75bn in additional capital to return to shareholders. "The additional capital efficiency as well as the downside protection will permit Swiss Re to retain flexibility in a softening property and casualty market," said Jacques Aigrain, its chief executive. "Furthermore, it will advance our efforts to manage earnings volatility a key strategic priority."
The news sent Swiss Re shares up 3.7 per cent yesterday, valuing Berkshire Hathaway's stake at SFr859m, as investors took the investment to be a vote of confidence in the future of Swiss Re. There was also relief that Swiss Re had not announced any further mortgage-related writedowns, easing a concern that has dogged the stock since November.
The deal consolidates Mr Buffett's position as one of the most important powerbrokers in the insurance industry, a position he has been hoping to bolster further as the credit crisis plays out. At Berkshire Hathaway's annual meetings in recent years, attended by thousands of followers, Mr Buffett has repeatedly warned of the dangers of complex credit derivatives, whose value he questioned. Their collapse has threatened to engulf parts of the insurance industry, specifically the so-called monoline insurers, which expanded aggressively by selling protection against defaults on mortgage derivatives. With many monoline insurers fighting for survival, Mr Buffett set up a rival monoline insurer last month.
The takeover of part of Swiss Re's future business by Berkshire Hathaway left many analysts scratching their heads, since no financial details of the contract were revealed. William Hawkins, insurance analyst at Keefe, Bruyette & Woods, described it as "an odd coupling". He told clients: "Berkshire Hathaway is not a charity and when we see them taking such a significant role in the strategic future of a major competitor, we believe it is wise to be cautious."