Buffett drops stake in Munich Re as reinsurance woes intensify

Warren Buffett’s Berkshire Hathaway has decreased its shares in the reinsurer as “prospects turn for the worse” in the sector.

Insurance News

By

Things are continuing to go downhill for the reinsurance industry.

Warren Buffett announced Tuesday that Berkshire Hathaway Inc. would be decreasing its stake in Munich Re, from a 12% holding to a 9.7% holding. The news comes as reinsurers continue to face heightened competition from Wall Street investors seeking investment opportunities unattached to financial markets.

Berkshire, which is also active in the reinsurance space, had previously invested in Munich Re and Swiss Re from 2008 to 2010. Shares had jumped through 2014 before stalling in 2015.

Buffett has previously spoken out on the reinsurance slump, telling shareholders in May that the business was headed for a downturn.

“It’s a business whose prospects have turned for the worse and there’s not much we can do about it,” Buffett said at the time.

Similarly, the company’s reinsurance leader, Ajit Jain, made headlines earlier this month when he signaled that tough industry changes would likely mean a change of investment strategy for Berkshire Hathaway.

“What was a very lucrative business is on longer a very lucrative business going forward,” Jain told the Wall Street Journal. “Bust since the reinsurance business isn’t going to offer as many opportunities for the foreseeable future, we feel like we should go down the food chain.”

That means more money – and perhaps heightened merger and acquisition activity – in the in the commercial and wholesale space. Meanwhile, profound changes are awaiting the reinsurance market.

The growth of alternative capital, particularly in the form of catastrophe bonds and other collateral-backed vehicles, now accounts for 12% of reinsurance capacity. That’s about twice what it was five years ago, according to financial rater Moody’s.

Additionally, the primary insurance market’s capacity is almost historic. Last year, these carriers passed on the lowest share of policy risk to the reinsurance market since before 2000s.

This is creating pressure on reinsurance pricing. Pretax profits for the Lloyd’s of London market were down nearly 30% in the first half of 2015 as compared to the same period last year.

Munich Re extended losses and fell 1.45 follow Berkshire Hathaway’s announcement.  
 
 

Keep up with the latest news and events

Join our mailing list, it’s free!