Warren Buffett’s latest investment move underlines big opportunities in reinsurance market

Warren Buffett’s investment company Berkshire Hathaway recently announced the acquisition of US-based conglomerate Alleghany at a price of $848.02 per share, with the overall equity value pegged at $11.6 billion. The move marks a very public end to a long drought in large investments for the notoriously shrewd American billionaire, whose last major acquisition was his 2016 buyout of Precision Castparts for around $37 billion.

In the intervening years, Berkshire Hathaway has mostly used its $147 billion cash pile to invest in blue-chip stocks or to finance aggressive buybacks of its own stock. The acquisition of Alleghany, which has a wide variety of business units but is especially active in the reinsurance market, has also attracted the attention of worldwide investors since Buffett himself had recently complained about the lack of exciting large deals to get involved in.

However, the Alleghany investment comes as no surprise to people familiar with either Buffett or the insurance sector. One of the defining traits of the billionaire’s successful investment strategy is his focus on a select number of industries he is intimately familiar with. In the case of Alleghany, Buffett is bolstering his already large portfolio in the insurance and reinsurance market, which includes the likes of Geico – one of the biggest car insurance companies in the US – and reinsurer Gen Re. Alleghany is also a company that Buffett knows well, due to his personal friendship with its current CEO Joseph Brandon.

Aside from his knowledge of the business and industry, the deal also makes significant commercial sense for Buffett. Out of Alleghany’s total net asset value of $9.19 billion, around $5.40 billion comes from the reinsurance side of the business. And, according to Cathy Seifert – an analyst at CFRA Research—investing in insurance and reinsurance was a particularly appealing prospect “at a time when market conditions remain attractive for growth”.

While Berkshire’s first large take-over in six years has understandably captured the headlines, Buffett is not the only savvy investor to bet on the reinsurance sector over the last few months.

Over in Europe, Covéa – which groups together some of France’s largest mutual insurance companies—agreed terms in December over the acquisition of the twelfth biggest reinsurer in the world, PartnerRe. The deal between Covéa and PartnerRe’s previous owner Exor was apparently reached for a reported €7.8 billion (equivalent to around $9 billion). Aside from being a deal of similar size to Buffett’s acquisition, Covéa’s take-over of PartnerRe was also struck on similarly favourable terms. According to the Nebraska-based billionaire, Berkshire is purchasing Alleghany for 1.26 times its book value, whereas Covéa agreed to acquire PartnerRe for a multiple of around 1.28.

With the Covéa-PartnerRe deal set to receive the final green light by regulators in the coming months, it ties together two companies with robust finances. Covéa, whose equity amounted to €16.4 billion in December 2020 (around $18 billion), is therefore poised to add PartnerRe’s thriving reinsurance business to its portfolio, worth around $7bn according to the latest figures. In 2021, PartnerRe also reported a non-life underwriting profit of $507 million, a particularly strong performance and a significant increase on the year before.

Reinsurance – which covers the losses suffered by primary insurers – was among the many industries to initially struggle with the outbreak of COVID. Owing to a combination of business interruptions, a sharp rise in event cancellation claims, and life insurance policy pay-outs, the reinsurance industry unsurprisingly suffered financially during the pandemic.

However, the sector is now recovering and growing fast. With insurers increasingly aware of the increasing risk of wide-scale damage caused by issues such as climate change and geopolitical instability, demand for reinsurance is on the rise. According to Guy Carpenter, a global risk and reinsurance specialist, the dedicated total capital to reinsurance was around $534 billion in 2021, growing almost 3% on the previous year. In the words of Thierry Derez, CEO of Covéa, it does seem like “the right time to join the sector.”

Even prior to the pandemic, there had already been several large-scale acquisitions of reinsurers by insurance companies. In 2017, for instance, US-based insurer Axis Capital finalised its take-over of Lloyds of London firm Novae Group for a reported £477.6 million (in excess of $600 million). A year later, it was the turn of French insurance and investment giant AXA to acquire XL Group Ltd – a property insurance and reinsurance firm – for an estimated $15.3 billion.

The two latest deals signal a potential return of the industry trend that saw insurance companies seeking to acquire reinsurers. The fact that Warren Buffett – colloquially referred to as the Oracle of Omaha for his ability to read the market and spot opportunities – decided to throw his hat into the ring is also telling about the potential for growth and profit in the reinsurance industry.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes