January 26, 2010 / 9:03 AM / 10 years ago

Buffett's Berkshire takes $1 billion Munich Re stake

FRANKFURT/NEW YORK (Reuters) - Warren Buffett’s Berkshire Hathaway Inc has amassed a $1 billion stake in Germany’s Munich Re, boosting its already large exposure to the reinsurance sector even as it prepares to complete its biggest acquisition.

Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar

Munich Re on Tuesday said Berkshire’s stake rose on January 18 to 3.045 percent, just above the level at which such holdings must be disclosed.

“Warren Buffett is an expert at assessing risk qualitatively and has been in this business a long time,” said Andy Kern, who teaches Buffett’s strategies at the University of Missouri at Columbia and writes the Berkshire Ruminations blog. “It may also be he finds the stock cheap.”

Berkshire owns General Re and is the world’s third-largest reinsurer. Its Munich Re stake was revealed 11 months after Berkshire injected 3 billion Swiss francs ($2.88 billion) into Swiss Re, after the world’s second-largest reinsurer wrote down large sums of illiquid assets.

Buffett, through his assistant Carrie Kizer, had no immediate comment. A Munich Re spokeswoman said Buffett’s investment may be “evidence of our sustainable strategy.”

Berkshire expects this quarter to complete its acquisition of the 77.4 percent it did not already own of Burlington Northern Santa Fe Corp, the second-largest U.S. railroad operator, for roughly $26.4 billion.

The company’s largest previous acquisition was its 1998 takeover of General Re.

BIG ACQUISITION COMING

Munich Re shares closed Tuesday up 1.2 percent at 109.80 euros, triple the gain in the DJ Stoxx European insurance index. Over the last 18 months, however, Munich Re stock is up only about 2 percent, while the index has risen 21 percent.

Reinsurers provide cover for insurers responsible for losses from catastrophes such as hurricanes and earthquakes.

Buffett has said Omaha, Nebraska-based Berkshire can absorb a multibillion-dollar loss from a single catastrophe.

“It’s a business he knows and understands,” said David Schiff, editor of Schiff’s Insurance Observer. “He may view Munich Re as a big company that can do well over decades.”

In a recent research note, JPMorgan said Munich Re may benefit from solvency rules scheduled to take effect in the next three years, because of its ability to generate excess capital and to expand.

Munich Re has resumed share buybacks and is expected to report a 2009 net profit of 2.36 billion euros ($3.33 billion), according to Thomson Reuters StarMine.

“It appears to be a portfolio investment for Buffett rather than a strategic one,” JPMorgan analyst Michael Huttner said.

Munich Re stock trades at 8.6 times analyst forecasts for expected earnings over the next year, above Swiss Re’s 8.1 multiple, Thomson Reuters StarMine said.

Swiss Re last week said it will transfer a U.S. life reinsurance contract to Berkshire for 1.3 billion Swiss francs ($1.25 billion), and deploy capital elsewhere.

(Reporting by Jonathan Gould and Jonathan Stempel; Editing by Rupert Winchester, David Holmes and John Wallace)

($1 = 1.04 Swiss franc)

1 euro = $1.41

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