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Berkshire buys 3 bn Swiss Re Converts


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Perhaps they need some retro-cessional re-insurance from ORH?  My, my, how the tables turn:

- FFH could loan Swiss Re some money - surely a better risk than ABH

- Elliot Spitzer no longer around to prosecute by media. 

- FFH holds CDS on Swiss Re.

- naked short sellers facing possible legal actions and certain civil actions

And Swiss Re gets the higher ratings?

All in 3 years. 


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Not sure the original link is working.  Here's a different link:  http://www.swissre.com/pws/media%20centre/news/news_releases_2009/preliminary_and_unaudited_2008_results.html


As part of this effort, the Group and Berkshire Hathaway have agreed in principle that Berkshire Hathaway will invest CHF 3 billion in Swiss Re. The final closing of the investment is subject to shareholder approval. The investment is expected to be in the form of a convertible perpetual capital instrument issued by Swiss Re with a 12% coupon. At Berkshire Hathaway’s option, it will be convertible after three years into Swiss Re shares, with a price of CHF 25 per share (subject to anti-dilution adjustments).


Warren Buffett commented, “We are delighted to have this opportunity to increase our investment in Swiss Re. I am very impressed by Jacques Aigrain and his management team.”


This little tidbit was tucked in there as well:

The Group has also agreed, subject to regulatory approval, to enter into an adverse development cover with Berkshire Hathaway on the Group’s total Property & Casualty reserves. The contract will provide total coverage of CHF 5 billion.


Someone at the TMF BRK board suggested that BRK received a 2billion premium for this meaning BRK basically reinvested that premium plus 1 billion of it's own at 12%.  Anyone here have some insight about that?  Seems like a pretty good deal. 


Link to presentation slides:  http://www.swissre.com/resources/170346804cebd7cd962ab798e2cf17c9-FY2008_preliminary_results_FINAL.pdf

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I wasn't excited about Swiss Re, because when I looked at his assets, there is several stuff that I didn't understood. It wasn't plain vanilla stuff.


But since that it's where the puck is going to be that we have to focus, here is a good quote about where the puck is probably going to be in few years from now:


"The company became too clever and too sophisticated for its own good. They were dreaming up all these wonderful things that look great on a stochastic model and everyone lost touch with the basics of the business. The goal now is to become a boring reinsurer."


Tim Dawson, equity analyst at Helvea, reponds to Swiss Re's 2008 results.


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I'm more positive on the deal.


On the positives,


WEB structured the deal so that the perpetual capital instruments/bonds will earn coupons at 12, for the 3 year period which will then be converted sometime thereafter at 25 euros or so. Looking at the current stock price there is a lot of upside, whilst the short term, the downsides are mitigated with the coupon payments:




One should also note that the 3B investment was made in Swiss Francs (CHF), with the recent appreciation of the US dollar this is a good time to be looking overseas, if inflationary pressures do cause downside risk to the USD.


What is interesting is Swiss Re has about 42% of it's premiums from North America and another 45% in Europe. The European diversification gives Berkshire better strategic positioning in the European market should WEB choose to exercise the bonds and take 25% ownership of Swiss Re later on. Long term market trends point towards more consolidation among the bigger players in the P&C insurance business, and this can only be a good thing for Berkshire.


On the downsides, what concerns me is Swiss Re's investment portfolio:


- mortgage loans/securities = 11%

- corporate bonds = 15%

- structured products = 14%

- With the rest primarily in government + cash.


This is predominantly why they've run into capital problems and will be needing a further 2Bn CHFs capital injection.


Combined ratios are decent, and if anyone can work the reinsurance business it's Jain/WEB. With the added protection of the 12% coupons in the meantime, I think it's a winner. Main issue is the asset side of the balance sheet.

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