The legendary American investor Warren Buffett once said “The investor of today does not profit from yesterday’s growth.”
And this assessment is also reflected in his latest move: the sale of shares in Munich Re.
According to an official voting rights announcement, he is now reducing his share of the reinsurer, listed on Germany’s benchmark DAX index, to 4.6 percent. This is a significant step. Mr. Buffett began investing in the insurance company in 2010. With a holding of up to 12 percent, his company, Berkshire Hathaway, was long the largest single shareholder in the world’s largest reinsurance company. It was a worthwhile investment for Mr. Buffett. Munich Re’s share price has increased from about €100 ($110) in 2010 to more than €180 today, and Munich Re has paid out more than €6 billion in dividends to its shareholders in the same time period. In addition, a number of share buybacks have increased earnings per share.
It comes as no surprise that Mr. Buffett is pulling out of the business. He had already reduced his share in Swiss Re in the summer, and he sold a large share of his Munich Re stock in early September.
But times have changed. The future of Munich Re, and of the entire industry, is far from rosy. The operational business is no longer as profitable as it once was. New competitors, attracted by the prospect of lucrative profits (provided there are no natural disasters), are intensifying competition and creating pressure on margins. Earnings from the reinsurance business are declining, as are profits in the capital market. Low interest rates in capital markets have adversely affected the direct insurance business, which Munich Re operates through subsidiary Ergo.
The air is getting thinner. This year, the consolidated earnings of Munich Re will reach “at least three billion,” CEO Nikolaus von Bomhard said recently. Consolidated earnings were just under €3.2 billion in 2014 and €3.3 billion the year before.
Mr. Buffett’s company, Berkshire Hathaway, itself one of the world’s largest reinsurers, has not been doing particularly well in the insurance business lately. Reinsurance is “a business whose outlook has changed for the worse,” the 85-year-old, considered the worlds third-richest man, said at the annual shareholders’ meeting in the spring of 2015. “And there is not a lot we can do about it.”
It comes as no surprise that Mr. Buffett is pulling out of the business. He had already reduced his share in Swiss Re in the summer, and he sold a large share of his Munich Re stock in early September. The step did not trigger any significant reaction on the stock market at the time, and the Munich Re share price declined by only a small amount.
The security is currently trading at €183.25, an 11-percent gain over the beginning of the year. Many analysts still take a positive view of the share. According to Bloomberg market service, 13 of 36 analysts it polled currently recommend buying the security while 17 recommend holding it. Most analysts cite Munich Re’s generous dividend distributions as grounds for their recommendation.
However, more and more market speculators have been skeptical recently. In a detailed note on the reinsurance industry, Goldman Sachs analyst William Elderkin said his assessment of the outlook for European insurers was positive but warned that Munich Re will likely underperform, because of the increasingly apparent decline in profitability. Warren Buffett apparently shares the same skepticism.
Kerstin Leitel covers banks and insurance companies. To contact the author: email@example.com