I Initiated a Position in Munich Re at Almost the Same Price as Berkshire!

The main reason I bought Munich Re is because it is cheap. The stock is trading under its book value; this is a rare event historically. The other reason is because it seems like a very conservative company that does not want to trade volume for risk. It's in a very stable land, Germany. It's growing in emerging markets and in specialized types of insurance and reinsurance like big catastrophes where premiums are more complex.

Warren Buffett has been steadily buying and adding since 2008, and already owns 10%, making him the biggest shareholder via Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). He even has it in his private portfolio, Tweedy Browne also and just added a big position after the Japanese earthquake. Now there is an opportunity to buy because after all the big catastrophes in Japan, Chile and Australia, the insurance industry has been hit hard, and there is quite a lot of negativism in it that has pushed the prices down. Also, it is an European company and there is some negative press due to Greece and Portugal sovereign debt problems.

But on the other hand this will be good in the long term, and the catastrophes are a reason to justify higher premiums from here on, especially considering that premiums have recently been at record lows.

Finally, I like the way they invest their float on safe instruments. And, it is worth mentioning that they have been buying back lots of shares. It is very important to note that both Buffett and Tweedy Browne have bought at prices very similar to today, mostly all above 105 euro/share. Even Buffett started buying in 2008 at much higher levels. Also, Black Rock as of the beginning of 2010 had 4.58% of the company, and I just checked and today he has even more. That is quite a sign of confidence on the sector too.

Here below is the buying history of Warren Buffett. Note that he already owns more than 10% of the company, and he had just 3% a bit over a year ago. He has been quietly adding; it was not mentioned in the annual meeting, and there has not been much publicity about it. Plus, also note that he has 100,000 shares in his private portfolio which is not insignificant, especially considering that his private portfolio is not as big as his interests in Berkshire.

May 28, 2008, a short time after he takes a position he mentions on an interview with Germany's Der Spiegel that it is a trading position, so therefore he would not hold forever. But it is also a sign that he thinks it is undervalued. On the other hand now on hindsight it seems a bit contradictory with the fact that he has built a 10% ownership of the company. Actually, he is the biggest owner, so it seems quite a huge position for trading. Note that it is now one of his top 10 positions.

Then again in the article he is specifically referring to the companies he has on his portfolio as trading positions (not fully owned), but all who know just a little bit about Buffett know that many of those companies have been there for many many years, such as Coca-Cola (NYSE:KO), American Express (NYSE:AXP), Wells Fargo (WFC), etc. In my opinion he never buys if he does not see a clear business case for the next 10 years. Remember that also Burlington started as a trading position, until he bought it all!

So nothing is ruled out here. He easily could buy it given that it just costs a bit more than $20 billions, and he already has 10% and liked it enough to buy it at its current price. Finally, here is an excerpt of the interview in Germany in 2008, while on a trip to promote Berkshire as a candidate to buy German companies. It is here that he disclosed publicly his initial position:

SPIEGEL: In addition to companies like Coca-Cola and Procter & Gamble, you have invested many billions of dollars in reinsurance companies. Now insurance premiums are falling. Did you make a mistake?

Buffett: I have been in the business since 1970, and it's always gone up and down. Perhaps I won't make quite as much money in the next 12 months, but overall I believe that the industry is in good shape, despite the current slump. When we buy something, we stay forever and forever. Many find this irritating, but that's just the way we are.

SPIEGEL: Munich Re was the first German company in which you invested directly. Another investment for posterity?

Buffett: We have two different categories at Berkshire Hathaway. There are 76 companies that we own permanently. And then there is a trading inventory. Munich Re is part of the second category.

Here is the interview source in Der Spiegel

January 26, 2010 Warren Buffett Increases Stake in Munich Re Above 3 percent. (New York-based BlackRock (APX) increased its stake in Munich Re through the purchase of Barclays Global Investors and held 4.58 percent on December 1, according to the reinsurer.): Article source in Bloomberg

Feb 12, 2010 Buffett's stake rises above 5 percent. (Munich Re had earlier announced that Buffett also held options potentially giving him a further 1.945 percent stake in the company. The exercise date for the options is March 11. so this potentially raises his stake to 7%): Article source in reuters

Mar 25, 2010 Buffett raises Munich Re stake to nearly 8 percent. (Analysts and even Munich Re itself have only been able to speculate about Buffett's motives for building up the holding, as Buffett's representatives have stuck to their policy of declining comment.): Article source in reuters

Oct 11, 2010 Buffett’s stake in Munich Re reaches 10.028 percent of voting rights: Article source on the Wall Street Journal

And here is the buying history of another value fund, the legendary Tweedy, Browne: historical purchases. Note that it represents 4 percent of his portfolio and that he very recently added 33 percent to his positions.

I always invest when I am personally convinced and do not just blindly follow anyone, not even Buffett. I have been reading the last 10 years of annual reports, making sure that there is nothing wrong that I am missing, and I am more convinced that it has never been so cheap.

I am beginning to understand why Buffett, BlackRock and Tweedy, Browne have been buying. Their solvency requirements are now 2.5 times more than the legal standard. Even after 2000-2002 when the stock dropped from $380 to $109 it was not as cheap on a fundamental basis compared to its book value.

The Japanese earthquake has already been discounted from their equity. Because of re-buying, there are now less stocks than back then. Dividends are higher and quite strong; assets are stronger; book value is bigger; price/book is lower; and their investment portfolio is now less reliable on stocks, thus less dependent on the vagaries of the stock market.

It now has a stronger international foothold than before and a better primary insurance business via their ERGO product. Private healthcare is more profitable, because of lower costs, due to the savings mentality of the population that go to the doctor less and only with stronger reasons. Thus insurers pay less. Additionally, the most important, given inflation, and specially due to this and last year's natural catastrophes, primes are going up, and I believe it has not been adequately reflected in the market.

There are two other reasons why I like this investment, and it answers to requirements I have. 1) I want to diversify myself away from the U.S. dollar: This is an investments in euros. 2) I want to protect myself against inflation: This is a company that sells a utility that acts as a natural inflation hedge.

So all of the above are the reasons I bought. If you have some more, or especially reasons not to buy, feel free to drop a comment. Meanwhile I continue studying and I am hoping for lower prices to add more.

Cheers!

Juan Velasco (Feel free to visit my blog for all my investing moves.)

PD: Buffett has 19,259,600 shares with a dollar cost of 2,896 millions thats 150.37 dollars per share (see latest shareholders letter), the average Euro exchange rate that he bought them can be approximated and supposing that it is 1.4 it would make an average price of 107.4 euros per share, we can get it cheaper !

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