Warren Buffett has again reduced his investment in the reinsurance industry by cutting his share holdings in the world’s largest reinsurer Munich Re, as the ‘Sage of Omaha’ continues to dial back on his firm Berkshire Hathaway’s interest in reinsurance underwriting.
Much has been written in 2015 about Warren Buffett’s opinion of the reinsurance sector and the prospects for reinsurance underwriting returns in the future.
Despite having previously called insurance and reinsurance the “engine” of Berkshire Hathaway’s growth and continuing to invest heavily in his primary insurance businesses, Buffett has pulled back on underwriting property catastrophe risks and reduced his exposure to reinsurance pricing more generally.
In September Buffett reduced the shareholdings in Munich Re that his firms Berkshire Hathaway Inc. and National Indemnity Company held, from 12% to around 9.7% of the reinsurer.
Now, according to a report from Reuters, Buffett has reduced the holdings in Munich Re down to just 4.6%.
However, no matter how much Buffett dials back his direct investments in reinsurance, his firm Berkshire Hathaway continues to supply large amounts of reinsurance capital both through the syndicated market and through arrangements such as its investment in Australian insurer IAG.
Buffett is also breaking down the risk -> insurance -> reinsurance value chain, through initiatives such as the recently AA+ rated Berkshire Hathaway Direct Insurance Co., which will sell commercial policies, such as workers compensation and business owners’ package covers, online directly to buyers.
Some commentators have suggested that this direct online commercial platform could sell commercial property in future, which could be disruptive to the parts of the market which are more standardised and able to be transacted online.
Given its scale, Berkshire Hathaway does not need to cede much of the risk it writes back to reinsurers, not requiring protection of its own, so by writing commercial business direct and retaining the majority of the risk, Buffett is effectively reducing the costs that would have been associated with sourcing risk in the traditional syndicated and broker-led reinsurance marketplace.
So the appetite for assuming risk does not seem diminished at Berkshire Hathaway. One only has to look at the specialty business, the regular launches of new teams, lines of business and offices, to see an expansive approach to acquiring risk....MORE