Yesterday, Berkshire Hathaway (BRK-A) announced plans to contribute $2.6 billion to European reinsurance firm Swiss Re. Under terms of the deal, Berkshire will receive convertible bonds in Swiss Re that carry a lofty 12% coupon, and upon conversion, could give Berkshire a 20% stake in the company. This isn’t the first deal that Berkshire has done with Swiss Re, as last year Berkshire bought a 3% stake in the firm, and also struck a reinsurance pact, whereby Berkshire would take a pro-rata portion of Swiss Re’s European insurance exposure.
Given this existing reinsurance pact, it isn’t really surprising that Berkshire decided to add additional capital to Swiss Re at this time. Because of recent losses, rating agencies were contemplating reducing Swiss Re’s capital strength ratings, which would have meant that Swiss Re may have had trouble maintaining both the quality of its business and its pricing. Since a portion of this business would be passed along to Berkshire under the terms of their prior agreement, it was in Berkshire’s interest to help plug the hole in Swiss Re’s balance sheet.
In addition to this direct incentive to support Swiss Re, Berkshire also benefits from this relationship as it helps to diversify Berkshire’s own insurance portfolio at somewhat reasonable terms. What’s more, Buffett has always mentioned that he attempts to invest within his circle of competence, and given Berkshire’s long time participation in the insurance industry, he certainly knows a thing or two about this business.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
