Jump to content

Berkshire buys 3 bn Swiss Re Converts


MartinWhitman

Recommended Posts

Perhaps they need some retro-cessional re-insurance from ORH?  My, my, how the tables turn:

- FFH could loan Swiss Re some money - surely a better risk than ABH

- Elliot Spitzer no longer around to prosecute by media. 

- FFH holds CDS on Swiss Re.

- naked short sellers facing possible legal actions and certain civil actions

And Swiss Re gets the higher ratings?

All in 3 years. 

 

Link to comment
Share on other sites

Not sure the original link is working.  Here's a different link:  http://www.swissre.com/pws/media%20centre/news/news_releases_2009/preliminary_and_unaudited_2008_results.html

 

As part of this effort, the Group and Berkshire Hathaway have agreed in principle that Berkshire Hathaway will invest CHF 3 billion in Swiss Re. The final closing of the investment is subject to shareholder approval. The investment is expected to be in the form of a convertible perpetual capital instrument issued by Swiss Re with a 12% coupon. At Berkshire Hathaway’s option, it will be convertible after three years into Swiss Re shares, with a price of CHF 25 per share (subject to anti-dilution adjustments).

 

Warren Buffett commented, “We are delighted to have this opportunity to increase our investment in Swiss Re. I am very impressed by Jacques Aigrain and his management team.”

 

This little tidbit was tucked in there as well:

The Group has also agreed, subject to regulatory approval, to enter into an adverse development cover with Berkshire Hathaway on the Group’s total Property & Casualty reserves. The contract will provide total coverage of CHF 5 billion.

 

Someone at the TMF BRK board suggested that BRK received a 2billion premium for this meaning BRK basically reinvested that premium plus 1 billion of it's own at 12%.  Anyone here have some insight about that?  Seems like a pretty good deal. 

 

Link to presentation slides:  http://www.swissre.com/resources/170346804cebd7cd962ab798e2cf17c9-FY2008_preliminary_results_FINAL.pdf

Link to comment
Share on other sites

I wasn't excited about Swiss Re, because when I looked at his assets, there is several stuff that I didn't understood. It wasn't plain vanilla stuff.

 

But since that it's where the puck is going to be that we have to focus, here is a good quote about where the puck is probably going to be in few years from now:

 

"The company became too clever and too sophisticated for its own good. They were dreaming up all these wonderful things that look great on a stochastic model and everyone lost touch with the basics of the business. The goal now is to become a boring reinsurer."

 

Tim Dawson, equity analyst at Helvea, reponds to Swiss Re's 2008 results.

 

Link to comment
Share on other sites

I'm more positive on the deal.

 

On the positives,

 

WEB structured the deal so that the perpetual capital instruments/bonds will earn coupons at 12, for the 3 year period which will then be converted sometime thereafter at 25 euros or so. Looking at the current stock price there is a lot of upside, whilst the short term, the downsides are mitigated with the coupon payments:

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/swissre.jpg

 

One should also note that the 3B investment was made in Swiss Francs (CHF), with the recent appreciation of the US dollar this is a good time to be looking overseas, if inflationary pressures do cause downside risk to the USD.

 

What is interesting is Swiss Re has about 42% of it's premiums from North America and another 45% in Europe. The European diversification gives Berkshire better strategic positioning in the European market should WEB choose to exercise the bonds and take 25% ownership of Swiss Re later on. Long term market trends point towards more consolidation among the bigger players in the P&C insurance business, and this can only be a good thing for Berkshire.

 

On the downsides, what concerns me is Swiss Re's investment portfolio:

 

- mortgage loans/securities = 11%

- corporate bonds = 15%

- structured products = 14%

- With the rest primarily in government + cash.

 

This is predominantly why they've run into capital problems and will be needing a further 2Bn CHFs capital injection.

 

Combined ratios are decent, and if anyone can work the reinsurance business it's Jain/WEB. With the added protection of the 12% coupons in the meantime, I think it's a winner. Main issue is the asset side of the balance sheet.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...