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WEB bought more than 3% of Munich Re


MartinWhitman
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26 January 2010 

Release of an announcement according to Section 21 WpHG [German Securities Trading Act]

 

WKN 843002

ISIN DE0008430026

 

Warren E. Buffett, USA, informed us in accordance with Section 21, para. 1 of the German Securities Trading Act (WpHG) that its share of the voting rights in our company had exceeded the threshold of 3% on 18 January 2010 and amounted to 3.045% (6,011,029 voting rights) as per this date. Thereof 2.994% (5,911,029 voting rights) are attributable to him in accordance with Section 22, para. 1 sentence 1 item 1 of the WpHG.

 

Munich, 26 January 2010

 

The Board of Management

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NO! You can't be telling me that Buffett is still active!????

 

Doug Kass said he was going to buy BNI and then sit down and die on us.

 

 

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Maybe he should start picking up some shares in FFH, now that would be an interesting story.

Dan

Excellent!  Undervalued insurers are an excellent potential investment.  Now, if WEB wants to buy more shares in an insurance company, I know of a great little operation that is undervalued, well-reserved, and has top notch management.  It trades under the symbol BRK.B.

 

SJ

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Doug Kass is a smart guy, but he has been dead wrong on Buffett for a while.

 

I remember when Buffett was getting criticized for his equity put options he sold on various indices.  That is float, and quite a windfall!

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I also think this is probably a "market play" on reinsurance.

 

Whatsoever, Munich Re looks very cheap on the earnings side, but I would not feel confident investing in their 180+ bn. investment portfolio. Due to very low volatility in the stock, options are inexpensive and I consider buying LEAPs though.

 

 

 

 

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By the way, here is a funny comment from Tilson`s notes from Berkshire`s 2003 AGM. I certainly hope Warren told Charlie about his recent purchase ;)

 

Other Insurance Companies

 

Munger: I certainly hope that we're better underwriters than Munich Re.

 

Buffett: Let's not name names. Munich Re is a fine company. Our policy is that we compliment by name and criticize anonymously. They [Munich Re] lost their AAA because they were too exposed on the asset side -- they would tell you this. They have an important position and we do a lot of business with them.

 

Some reinsurers we won't do business with. If there were a major financial or natural catastrophe, there are a number of reinsurers who wouldn't pay.

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Munich Re Says Buffett Would Have Held More Than 5% of Rights

 

By Mike Gavin

 

Jan. 28 (Bloomberg) -- Munich Re said that Warren E. Buffett, by way of aggregation, would have held 5.029 percent of the company’s voting rights as of Jan. 19.

Last Updated: January 28, 2010 03:31 EST

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Something interesting is brewing. Buffett is using financial instruments in regards to his position at Munich Re.

 

Information found following link posted above from Munich Re's website:

 

Release according to Section 26, para. 1 of the WpHG [the German Securities Trading Act]

WKN 843002

ISIN DE0008430026

 

Warren E. Buffett, USA, informed us in accordance with Section 25, para. 1 of the German Securities Trading Act (WpHG) that on 19 January 2010 he directly or indirectly held financial instruments that granted him the right to subscribe to shares in our company which bear 1.945% of the voting rights (3,840,000 voting rights). Furthermore he informs us that in addition he held directly or indirectly 3.084% (6,088,300 voting rights) pursuant to Section 21 para. 1 in connection with 22 para 1 sentence 1 item 1 of the WpHG. Therefore by way of aggregation he would have held 5.029% of the voting rights (9,928,300 voting rights). As per this date he would have thus exceeded the threshold of 5% in the voting rights in our company.

 

The exercise date of the financial instruments is: 11 March 2010.

Financial instruments that he held directly were held via the following companies which are controlled by him:

 

- Berkshire Hathaway Inc.

- OBH Inc.

- National Indemnity Company

 

Munich, 28 January 2010

 

The Board of Management

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Is anybody familiar with option pricing?

 

I bought shares (5%+ dividend yield) and a few options of Munich Re.

 

These expire in dec 2013 and you are paying 17,- EUR for the right to buy a share of Munich for 100,- (currently around 110,-). I like options in the Munich Re case because their business (reinsurance pricing + managing the investment portfolio) is volatile so you can limit the downside somewhat. A negative in regard to the options is the high dividend payout for shareholders.

 

But nonetheless I think the options are dead cheap. Other thoughts?

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Is anybody familiar with option pricing?

 

I bought shares (5%+ dividend yield) and a few options of Munich Re.

 

These expire in dec 2013 and you are paying 17,- EUR for the right to buy a share of Munich for 100,- (currently around 110,-). I like options in the Munich Re case because their business (reinsurance pricing + managing the investment portfolio) is volatile so you can limit the downside somewhat. A negative in regard to the options is the high dividend payout for shareholders.

 

But nonetheless I think the options are dead cheap. Other thoughts?

 

 

Martin, there are a couple of ways to approach valuation of the calls.  The standard way is by using the BS model (pun intended:)  ( Actually BS is useful for valuing short term options.)  One can use historical volatility and compare that value to the values calculated under various arbitrary figures for implied vol.  Then these can be compared to the vol that is actually implied by the current pricing of the option in relation to the  parameters for the stock, including the very important high regular dividend that should theoretically be a drag on the future appreciation of the stock.  We'll run it through our calculator and get back to you later today. It's likely that the current price of the calls will turn out to be low in comparison to values established by these methods.

 

However, BS and related models truly are BS when used for pricing of LEAPS because they make no allowance for a commonsensical estimation of the trend which can overwhelm the influence of volatility especially for very long dated LEAPS.  Here's how we approach a buying decision for LEAPS:  First, we run BS three or four different ways to see if the option is a bargain by conventional valuation.  If so, we do a back of the envelope Bayesian analysis, assigning the best probabilities we can estimate for future scenarios of change in value for the common over the term of the LEAP.  Then, we combine the weighted probabilities and determine an expected value.  Finally, we estimate the probability for all the scenarios that lead to positive outcomes versus those that don't. This is important for position sizing because the expected gain may be high, for example 10 • the cost of the LEAP, but if half the outcomes lead to a loss, you shouldn't bet the farm.  Using the Kelly formula can be helpful for sizing the position, but you can ignore this if you're   betting a very small amount of your capital

 

The method I' ve described above can also be used for evaluating greatly distressed equity, for example the common of a co in Cpt 11.  You may recall a few years ago when we had a substantial holding in USG and you were chairman of the unsecured creditors committee.  In that case our holding USG common was like holding a six year LEAP (the average time it took then to reorganize an asbestos related bankruptcy) on the estimated probability that the co would exit Cpt 11 with something substantial left for the sharehoders.

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Martin, the BS value for the call European style is about 29 Euros, based on historical volatility.  The 17 Euros quoted implies volatility of about 25 to 26, not a bargain, and not high either, in view of the fact that historical vol is greatly influenced by the recent financial crisis.  In normal times a vol of 25 to 26 might .be a little on the high side.  All things considered, the current price is probably about right, as valued by those who follow Black Scholes.  The reason it's not a great bargain at the current price is the high dividend.

 

Nevertheless, the speculation is more likely than not to make money because Warren bought the stock and evidently calls.  The great majority of the purchases of the greatest stockpicker of all time work out very nicely in the frame of the time remaining on the option :)

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@twa

 

Thanks for your assessment of the Munich Re options. I especially liked your back-of-the-envelope approach because that is how i prefer to do financial analysis. ;-))

 

As regards to the exercise date Grenville mentioned: Isn`t it possible that these are simply equity swap derivatives or something? I would consider it extremely unlikely WEB would by short term calls.

 

By the way: My nick on this message board is just purely fictional. Sorry for confusing you, twa.

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Mystery solved!  Why WEB bought Munich Re.  Munich Re reported Q4 & EOY results today:  Q4 earnings E 780M; 2009 full year: E 2.56B; div +4.5% E 5.75.  Share buyback by April 28, up to E 1B.

 

Most important, they cut @ 6% of their property cat renewals and as a result their renewal pricing dropped only 1% from the very high rates of Jan 09.  :)  This implies that WEB has positively influenced the big three, BRK, Swiss Re & Munich Re to maintain pricing discipline in a market that would otherwise be significantly softening.  It is hard to overemphasize the importance of this development!  :)

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I hate myself for having bought the Munich Re Options. I think I am just not wired for these kinds of financial weapons of mass destructions ;)

 

 

Why? Did the price of the call drop?  If so, that may have been partly the downturn in the market and partly because there wasn't a sufficient margin of safety in the pricing of the option in view of the high regular dividend they pay.  They raised their dividend just after you bought the calls.  This will tend to lessen the value of future capital appreciation and the attractiveness of owning a call.  All is not lost, however,  you bought a leap and it's very likely that we may get substantial inflation before the leap expires.  If so, they should earn much more on their portfolio, and this surge in their earnings may lead to a higher price for the stock,  despite the drag on increasing BV from the high dividend.:)

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Indeed right now, we're seeing some cheapness due to fears about the downcycle of the reinsurance market (lower pricing on reinsurance contracts).

Some of the smaller Bermuda based reinsurer valuations:

 

http://i163.photobucket.com/albums/t314/ripleyx/reinsurers-smallmidcap-jan2010.jpg

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