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Jose Vasquez
Jose Vasquez
Articles (13)  | Author's Website |

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.


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 !

About the author:

Jose Vasquez
I was born in Spain and lived in France, Chile, USA and Belgium. I used to work in IT and Banking. I am a family man, I have a lovely wife, 3 sons and one step daughter. I have humble tastes, I like to stay home and read about companies. I started investing before the internet bubble. I knew little and liked technical analysis so my results were bad. Fortunately I did not have much to lose. Some years later in 2006, bored of doing real state investments, I opened an interactive brokers account and restarted. This time, not wanting to make mistakes, I decided to follow a model: Warren Buffett, he was at good making money via stocks. So I started reading about him, his shareholders letters, the books that he recommended, etc... I started applying his principles, reading 10K's digesting all sources of information. I started buying good and cheap companies to hold forever unless something changed fundamentally. When the housing crisis started I was 75% cash. By then I had identified good companies at very cheap prices so I invested most of my savings in stocks. It doubled fast. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. I changed lifestyle and moved from Belgium to the beach, Brazil, north east coast (www.kuchita.com). The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return, to move away from the inhuman life of civilization and to have some peace and sunny weather. Now I can think and study about companies 60 hours/week. I can finally do what I want full time and can say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! My portfolio is disclosed here: http://www.kuchita.com/view/sumo.php For more:

Visit Jose Vasquez's Website

Rating: 4.2/5 (32 votes)


Agustin - 8 years ago    Report SPAM
He disfrutado tanto leyendo el informe sobre Munich RE como tu historia vital. Había mirado el valor y lo consideraba también por no comprar todo USA. Un saludo desde Bilbao.

Sorry folks but is not frequent to find somebody from Spain.


Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Gracias Agustin, tambien creo que es buena idea no poner todos los huevos en USA. Desgraciadamente es dificil encontrar otros paises donde dan informacion clara, pero por suerte en Alemania publican todo en Ingles y te dire que la informacion que entregan las companias muy profunda, sobre todo las grandes empresas.

Por cierto tengo una empresa Vasca, CAF.MC, constructura de trenes, aqui puedes ver mi portfolio actual: www.kuchita.com/view/sumo.php

Saludos desde Bahia !

For English readers:

Thanks Agustin, I also believe that it is a good idea not to put all of the eggs in the USA. Unfortunately is is hard to find other countries where they publish clear and good information, but luckily in Germany they publish everything in English and from my experience the information disclosed by their companies is very deep, specially big companies.

By the way I have one Spanish/Basque company: CAF.MC, train builder, you probably have heard about it being from Bilbao, here you can see my current portfolio: www.kuchita.com/view/sumo.php

Greetings from Bahia !
Argonaut - 8 years ago    Report SPAM
Interesting article...as a side note, did you purchase on an overseas exchange or through the ADR? Either way they are about 10% above where Buffet most recently bought - assuming be bought pretty close to the low for that quarter.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Hi Argnaut, I bought via interactive brokers directly in Euronext for a 4 dollar commission. But you can also just buy the ADR: MURGF, just like Tweedy Browne recently did. Its the same and with interactive brokers it's even cheaper at least for me it's just 1 dollar when I buy the ADR, so maybe I should have done that to save 3 euros. Note that 30% of what Warren Buffett bought was in beginning 2008 at quite higher prices and that it is not clear that he managed to buy at the lowest price the following times. Also note that when he bought they had not bought nearly as much of their own stock as recently. It is also not clear this quarter if he is buying more, actually he said last time he bought that he planned to add more, but relying on that would be speculating. I just buy when I find the opportunity. I bought a lot of BNI also inspired by Buffett's first purchases and then following my own research, I bought like 22K and then one day, not too long later I saw that I had like 15K more on my portfolio, I though it was an error, I checked and rechecked my positions to finally pleasantly read that Buffett bought the whole company. Also by then I had bought BNI maybe a bit higher than the price he originally got. I'm not saying this will happen again though, the point is that when I think that the stock is cheap and the company is good I buy and if I am super convinced I buy much more, no point worrying if someone had it before at half my price or more or less. Then again it is nice to know Buffet et. al bought more or less around the same levels, actually if it was not for Buffett I might never have gotten interested in the company on the first place. And its a foreign company, that's what I am looking for, if it had been a local USA company already the price would have probably gone up much more, but that again is speculating... :)
Argonaut - 8 years ago    Report SPAM
Thank you.
Paparov - 8 years ago    Report SPAM
If we are going to have high inflation I think insurance companies are not the perfect hedge. 1. Rising interest rates are going to bring the value of their bond investments down. 2. Inflation raises the cost of claims made, especially this could be bad for the long tail insurance eg. Life.

Munich Re is a good company and I own shares too. I just disagree on the inflation part.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Paparov thanks good points, I should not have underlined the stock as an inflation hedge. Even though many insurers are talking about raising their prices due to the inflation expectations, so as long as they have pricing power to do it its already a good point. Actually I had temporary confusion with another position that I just added E.ON where inflation is a better hedge.

Anyways regarding the inflation I am worried about is the US Dollar inflation, that's why I want to find foreign companies. For the bond part I do not mind so much owning European bonds who are not in my opinion as overvalued as the Americans, I feel much better with how Europeans control their inflation, specially Germans, and also about how their control the printing machine. I think Europeans and specially Germans would freak out if they see inflation rise more than 4 or 5% and they have proven they are willing to control it, I cannot say the same for Americans. So if it was an American insurance company fully invested in american treasury bonds I would worry a lot. I also felt quite comfortable when I checked the structure of the portfolio bond of Munich Re, and their bond expiration dates, it did not strike me like they had too much on long term bonds who are more vulnerable to inflation.

A bigger worry for some is the bond exposure coming from the PIIGS but I checked and that is quite small.

But then again for long tail insurance inflation is always a problem, I guess they know that when they write it.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
This here http://www.gurufocus.com/news/36365/value-idea-analysis-munich-reinsurance-group was a very good analysis done by a fellow gurufocus publisher, at the beginning of October 2008 discussing Buffett's entry. It is quite more conservative than mine, arguably because of the big fear prevailing in the market in that specific month and the low prime rates prevailing back then and expected for the future. He argued quite correctly that the stock could be bought at 90 giving a 50% margin of safety, by then it was trading at 109, some days later, for just a couple of days the stock traded in the low 80's giving the chance to enter at a very low price. But then again, as Seth Klarman says, you can read, memorize and believe in Graham and Buffett, but when there is extreme fear the immense majority paralyzes, so I doubt that more than a handful seized the chance.

Some things changed since then for Munich Re, for one all the catastrophes wiped out all of 2011 profits most probably but then again and partly thanks to that the insurance primes are starting to go up finally, giving back the much needed profitability and growth that the business lacked.
Sivaram - 8 years ago    Report SPAM

"If we are going to have high inflation I think insurance companies are not the perfect hedge. 1. Rising interest rates are going to bring the value of their bond investments down. 2. Inflation raises the cost of claims made, especially this could be bad for the long tail insurance eg. Life.

Munich Re is a good company and I own shares too. I just disagree on the inflation part."


I don't know much about insurance but my guess is that insurers will do ok in inflation. I think your point about their bond portfolio declining in inflationary periods is true but since they try to match the maturity to their obligations and continuously roll over their holdings, I don't think inflation is that big of a deal.

If anything, I think insurers will face the biggest problems under deflation or really low inflation. In such scenarios, return on investment (especially on their bond portfolios) tend to be really low. If you look at insurers in Japan, almost all of them were insolvent in the early 2000's due to very low interest rates on their bond holdings. I believe US insurers also faced problems in the low-inflation 30's and 40's but didn't do that badly in the inflationary 60's and 70's.

I suspect insurers will face serious problems if bond yields stay low for a long time (or stock returns stay low). But this is just a feeling and I am not that knowledgeable about insurers.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
The blog I point to below is quite good if you want to learn about inflation and its impact on insurance, indeed low inflation can be a big problem maybe even bigger than higher one, here is an explanation:

Inflation affects life and non-life insurers in different ways[/b]

For non-life insurers, unanticipated inflation leads to higher claims costs, thereby eroding profitability. For life insurers, both inflation and deflation are risks. Inflation is often accompanied by rising interest rates, which reduce the value of return guarantees. Rising inflation can have a negative effect on demand, and may lead to policyholders cancelling their policies as well as increasing costs for insurers. In the case of deflation, or if very low inflation persists, interest rates tend to fall. This makes it more difficult for life insurers with large portfolios of minimum interest rate guarantee savings products to earn the appropriate asset returns.

[b]Insurers have several options for mitigating inflation risk

Insurers concerned about inflation risk can mitigate this risk in several ways. On the asset side, insurers can invest in commodities, real estate and inflation indexed bonds, which are most viable inflation hedges. These investments have performed well during periods of high inflation.

Insurers can also modify insurance contracts to shorten the tail and hence the development risk. Insurers can introduce claims made' policies or sunset clauses to address the issue of latent claims. They can also add index clauses linking premiums, limits and deductibles/retention to an inflation-related


Source: _http://niasomnews.blogspot.com/2011/01/how-inflation-impacts-insurers.html

The article from the blog above copied the results of a Swiss Re inflation study. That recent study points out, high inflation can be mitigated:

Swiss Re underscored the fact that “many insurers have identified it as one of their key risks.” The study found that “insurers can limit the impact of inflation on investment returns, asset valuations and future insurance liabilities by using inflation hedges, adding index clauses to contracts and buying reinsurance.”

That is quite well explained in their study which is resumed in this article: _http://www.insurancejournal.com/news/international/2010/10/19/114138.htm

The conclusion is that as long as it is anticipated it can be worked out or at least controlled a bit. And that only extremes high persistent inflation or deflation are a problem. That is why I like Munich Re because it operates more than anything in Europe where they are very clear about controlling inflation and not printing too much money and not abusing from monetary policies. So congrats I am quite impressed about your intuition and observation for a person not knowledgeable about insurance!.
Pooky - 8 years ago    Report SPAM

What caused the the stock to drop from $380 to $109 a decade ago?

Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Pooky, Good question I asked myself the same to understand the dynamics of the business and to asses the probability of losing value so I read the year reports and there were mainly 3 causes as I see it:

1) first and mostly it was extremely overvalued at several times book value, it deserved a big correction.

2) 9/11 had a big effect due to the costs, the fear, and putting the spotlight on revaluing insurers

3) the biggest correction came when the market went down a lot for quite a long period after the internet bubble popped, this had a huge influence because they used to be much more heavily weighted towards stocks in their assets back then and their stock portfolio due to the market fall of the year 2002 was written down by 5.7 billions, that pushed the equity down to 13.9 billions (from 19.4) that freaked out a lot of investors and they sold out. Note that even at the lowest stock price did the p/b reach 1 (like today)! So we are now close to a multi year low price compared to book, but the balance sheet now is stronger, they have a bigger equity and almost no reliance on stocks, and they concentrate more on special types of insurance that can be better priced (less low margin commodity type of insurance) and invest mostly on bonds (of several types), and finally primes are going up (thats what counts more for their income), the catastrophes have helped to ask for more premium...

Conclusion: it seems it went in a decade from quite overvalued to the other extreme.

Clemo69 premium member - 8 years ago

Great analysis. And the reason that Munich Re is one of my largest positions.
Pooky - 8 years ago    Report SPAM
Juan, Thanks for the response. I've decided to initiate a position.

Does anyone know what ADR dividend payout is?

I'm a Canadian, and I'm trying to decide whether to buy in Europe or buy the US ADR. My broker doesn't offer electronic trading on Euro exchanges, so it would probably cost me alot to do a phone trade. Also, with the ADR I could keep it in my US account, and not be subjected to mandatory dividend conversions (into CAD at inflated spreads) if I go the Euro route.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Hi Pooky, In 2010 the adr, which remember is 1/10th of a european share, paid 0.781 dollars (7.81 for 10 adr shares) which is equivalent to the 6.25 euros paid in europe, given the exchange rate at the time. You can check that on the sec, the annual report and in any site like yahoo finance.
Pooky - 8 years ago    Report SPAM
Juan, thanks for the response. Am I looking at the right ADR?


How can the ADR be 1/10th of a share when it trades at $150.50 USD? Isn't Munich Re trading in Europe right now for 105 Euros?

Thanks again.

Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Im referring to the murgy adr, thats the only one I could buy through my broker: _http://finance.yahoo.com/q?s=murgy.pk
Liarspoker - 8 years ago    Report SPAM

Added at Euro 104 this morning. Will add more, in greater quantities, if the price continues to fall.
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
Hi Liarspoker, Nice entry point. I've been adding too since I wrote the article, plan also to maybe double if it hopefully falls more. Positions disclosure: www.kuchita.com/view/portfolio.php
Jose Vasquez
Jose Vasquez - 8 years ago    Report SPAM
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 !
Argonaut - 8 years ago    Report SPAM
(my apologies for those who see a cross post here - I am seeking some quick answers :))

1) Does anyone know if the US Murgy ADR pays a dividend? Some sites appear to show one and some don't. I understand the overseas actual stock is now up to 7% which seems great...

2) I am wondering about the foreign exchange risk of holding the actual overseas stock (I am US based) thoughts?

3) for those who bought the ADRs...Also, is there a depository service fee for the US ADRs and how much does that amount to?

Batbeer2 premium member - 8 years ago
>> I am wondering about the foreign exchange risk of holding the actual overseas stock (I am US based) thoughts?

I think of it like eBay. You are bidding for an asset. Once you own it, it makes no difference if you bought that asset with euros or dollars.

The asset is of course a company, Munich Re. The company sells insurance. They collect the cash premium upfront, and invest that income.... again, once they own the assets it does not matter whether they collected the premium in dollars or euros.

It becomes really interesting if you find they collected the premium and bought a lot of bonds.... say greek government bonds.

But that was not your question. There may be forex risk but that risk does not change one bit if you choose to pay for your shares using dollars.

Just random thoughts.
Argonaut - 8 years ago    Report SPAM
Thanks. I was referring to when you go to sell the stock. In addition to to whether stock price of the company has increased or decreased, you have the potential increase or decrease of the conversion back to dollars...
Batbeer2 premium member - 8 years ago

Imagine you're not bidding for an asset on eBay but you're the seller. Does it matter to you if the bid is in euros or dollars ?

In short, your exposure to forex risk is absolutely equal whether you own the ADR or the stock itself.


You should probably track down the documentation for the ADR before you buy but I guess ADRs are a bit more efficient for US citizens.

Americans sell ADRs among each other without first buying euros etc. With the ordinary stock, you need to exchange your dollars to euros and then buy the stock. When you sell you need to convert back. That's not forex risk but it's a cost. If you think of the cost involved when one US citizen citizen buys the (euro) stock from another..... yes the ADR should be more efficient.
HG2001 - 8 years ago    Report SPAM

My comments to the price of 105 Euro....

  1. I believe your calculation is too agressive. Average eranings of MR are around 2.5BN during the last 10 years. 2011 will be in the same range. Future perspective;Is more declining than increasing – since the reinsurance business is getting more difficult. P/E should be 8.5 (or even lower) instead of 10 – 0 growth in the future. I would say that current price has no margin of safety.

    Today i worte this...

  2. Reply

  3. HG2001 says:

    September 14, 2011 at 10:10 am

    Bought today MR shares for 79 Euro with a margin of safety (according to my calculation) of around 43%. Did a DCF with 2% first 5 years and 1% terminate value. EPS I used 10 year average earnings (1.8 BN) divided by todays number of shares. So i believe pretty conservative view …Entered with 1/5 of my total asset value. If the course will go below 79 Euro again i will enter with additional 1/5. Downside risk i see is that MR has still italian governent bonds (5bn). I expect that this years earnings will be below 10 years average (1.8bn).

    Any comments...?

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