Andrew Barile, a reinsurance consultant, explains why Warren Buffett is increasing his influence at the world's leading reinsurance companies.
When reinsurance renewal rates stay flat, share prices of reinsurers go down, and we see this in Warren Buffett continuing to increase his stock holdings in Munich Re and Swiss Re, the world’s two largest reinsurance companies.
The economic crisis has affected the global reinsurance industry. Owing to the recession, premiums are down for workers’ compensation cover, and clients are buying less property insurance. Meanwhile, reinsurers’ bottom lines have been strengthened by the recovery of asset values. This has enabled them to protect the balance sheets of primary insurance companies, utilising the existing reinsurance products, quota share, surplus relief, excess of loss, and catastrophe (industry loss warranty covers).
Buffett recognises that the reinsurance market is facing tighter regulatory supervision and low interest rates, keeping reinsurance stock prices low. Certainly, an opportunity exists to buy Munich Re stock at a low price.
What do buyers of reinsurance want from their reinsurance company markets? Buyers’ priorities have not changed in 30 years. These include:
• Impeccable financial strength.
• Price of reinsurance.
• Reinsurance litigation: what is the reinsurer’s track record?
• Does the reinsurer provide underwriting expertise, market knowledge, experience of asset investments, actuarial services, and claims handling?
All of these factors are covered by Munich Re and Swiss Re. Buffett clearly recognises this and he will no doubt be looking to increase his influence in their management.
Andrew J Barile runs a (re)insurance consulting firm in New York and Georgia