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Holly LaFon
Holly LaFon
Articles (10163)  | Author's Website |

Warren Buffett Proves Right and Wrong About Munich Re

Shares of company he sold last year have traded up but industry may be dimming

March 21, 2017 | About:

Buffett sold a large portion of his stake in Munich Re (HAM:MUV2) in 2015 citing a terrible outlook for the reinsurance business. A year and a half later, it’s clear he would have continued to profit on the stock if he had held it, but it is unclear how long that will last and whether his vision is still to come true.

The CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) held more than 10% of Munich Re, one of the world’s largest reinsurers with 50 billion euros in revenue, since 2010 and at one point held around 12% of the company. Munich Re’s stock in October 2010 started around $103.65 per share, but Buffett’s annual letter from that year showed that he paid roughly $150 per share for the entire 19,259,600-share holding with a total cost of $2.896 billion.

At his first reduction, from 11.8% at the end of 2014 to 9.7% on Sept. 28, 2015, shares traded for near $165, giving Berkshire a 10% gain. The market initially ignored Buffett’s September sell, trading the stock up to $183 by Dec. 11, when he slimmed the position again, from 9.7% to 4.6% -- under the threshold for reporting changes to the SEC. The trade gave him a gain of near 22%.

Berkshire had discussed its dim outlook for the industry before making the chop.

“The reinsurance business is not as good as it was,” Buffett said in May during his annual shareholder meeting. “It’s a business whose prospects have turned for the worse and there’s not much we can do about it.”

Ajit Jain, who oversees Berkshire's reinsurance businesses, echoed his statements in a Wall Street Journal interview in July. “What was a very lucrative business is no longer a very lucrative business going forward,” he said. “… Since the reinsurance business isn’t going to offer as many opportunities for the foreseeable future, we feel like we should go down the food chain.”

The market eventually began to agree with Buffett, and shares dipped to as low as $140.80 in July 2016, below his purchase price. But in the latter half of the year and into 2017, the shares of staged a resurgence, climbing to $177 per share as of market close Tuesday, higher than Buffett’s first sell, and at their highest point of $184.50, above his second purchase price.

In the long run, though, he may prove right. Munich Re last Wednesday announced lower profit guidance for 2017, expecting a range between 2 billion to 2.4 billion euros, a decline from 2.6 billion euros for 2016. The company’s board chairman, Nikolaus von Bomhard, said the forecast takes into account “what is set to be a challenging environment.”

Another member of the board, Torsten Jeworrek, cautioned of tougher times in the company’s fourth-quarter and full-year results statement in February.

“Market conditions for the renewals were once again challenging, even though the trend towards price reductions had continued to slow. So skilful cycle management is still extremely important, and Munich Re was once again able to react with flexibility in relation to changes. We withdrew from business that no longer met profit expectations – for instance, in China – and built up or expanded profitable business, either through new acquisitions or by strengthening existing client relationships,” he said.

The company was also beset with low interest rates, intense competition in the reinsurance market and, in 2016, catastrophe losses reaching their highest in four years.

Along with the low profit guidance, Munich Re announced a continuation of its share buyback program that proposes repurchasing 1 billion euros of shares by its annual meeting in April 2018. It also increased its dividend per share to 8.60 euros from 8.25 euros in 2015.

Munich Re has a P/E ratio of 11.09 and P/B ratio of 0.91.

See Warren Buffett (Trades, Portfolio)’s portfolio here.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

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