Berkshire Hathaway Looking at Bond Insurers
There have been a lot of rumours over the last few months speculating on Berkshire Hathaway investing money in bond insurers, not to mention mortgage lenders, investment banks, money center banks, and basically anything needing capital. Most of those were just rumours and speculation but now we have something credible from CNBC.
The interview with Ajit Jain cuts to the point and is hard to ignore. He is the insurance expert at Berkshire Hathaway and if he says they are talking to bond insurers, they are seriously considering some investments. This doesn't mean that something will happen for sure but it does mean an avenue for the capital-short bond insurers is opening up. Once upon a time (say 3 months ago), the bond insurers likely wouldn't have gotten a deal from Berkshire Hathaway because Warren Buffett always buys at a steep discount. But now that the stock prices have fallen by the wayside, bond insurers may be more comfortable cutting deals at big discounts. If these insurers survive, many of these deals likely won't be heavily dilutive, whereas 3 months ago, at 2x or 3x the current stock price the deals may have been quite dilutive.
None of this really solves the long term market concern with the bond insurers IMO. Berkshire has indicated that it is only interested in municipal bonds so unloading a chunk of the profitable muni bond portfolio means that structured products will have an even bigger impact on the bond insurers in the future.
But if Berkshire takes an equity stake (or an equity-type stake in something like convertible bonds) then it will send a very positive signal to the market. Very few are capable of betting against Warren Buffett in the long run, and long term monoline investors will be in good company.
Erin (anchor): So you would consider partnering with one of those companies or maybe even buying them down the line?
Jain (Berkshire insurance executive): Absolutely. And in fact we're in the process of talking to them right now, as we speak.
Erin: So this is something that could happen down the line? Well, it could be very soon?
Jain: Yeah. I mean, one thing has nothing to do with the other. As I said, we want to be in a state of readiness depending on what the leads are. We just want to be able to access the market in as many different ways as we can, much like any manufacturer would like to have a multi-channel strategy.
(source: CNBC, Jan 9 2009)
The interview with Ajit Jain cuts to the point and is hard to ignore. He is the insurance expert at Berkshire Hathaway and if he says they are talking to bond insurers, they are seriously considering some investments. This doesn't mean that something will happen for sure but it does mean an avenue for the capital-short bond insurers is opening up. Once upon a time (say 3 months ago), the bond insurers likely wouldn't have gotten a deal from Berkshire Hathaway because Warren Buffett always buys at a steep discount. But now that the stock prices have fallen by the wayside, bond insurers may be more comfortable cutting deals at big discounts. If these insurers survive, many of these deals likely won't be heavily dilutive, whereas 3 months ago, at 2x or 3x the current stock price the deals may have been quite dilutive.
None of this really solves the long term market concern with the bond insurers IMO. Berkshire has indicated that it is only interested in municipal bonds so unloading a chunk of the profitable muni bond portfolio means that structured products will have an even bigger impact on the bond insurers in the future.
But if Berkshire takes an equity stake (or an equity-type stake in something like convertible bonds) then it will send a very positive signal to the market. Very few are capable of betting against Warren Buffett in the long run, and long term monoline investors will be in good company.
I think definitely WB need to tap into the underwriting expertise of these companies. I think a partnership or equity stake from WB is a good thing for existing shareholders. Re-insurance is also a good thing as it allow them to retain their ratings in the least dilutive way(in today's price). I hope he is not going to acquire the company for a small premium, in which case I would lose big and you might just break even.
ReplyDeleteJohn
I don't understand your comment about how such a deal is not as dilutive(to ABK) when the stock price was higher. I would think it is a the opposite.
ReplyDeleteJohn
I think Jain's use of the word "support" and "capital" is quite substantial.
ReplyDeleteAnother important note from the interview was Jain acknowledging that Berkshire's foray is just "a drop in the bucket"
I like this guy.
His comment:
``We're looking at multiple ways to participate in the industry,'' Ajit Jain, head of Berkshire's new bond insurer, said today in an interview. Berkshire, based in Omaha, Nebraska, is ``looking at ways to support the existing insurers in terms of reinsurance and capital,'' he said.
I think what I said is incorrect. What I meant to say is that it is more palatable to shareholders now whereas it wouldn't have been a few months ago. I think you are right in pointing out that this isn't less dilutive now. It is simply more likely to be endorsed by shareholders now.
ReplyDeleteSince MBI already disclosed their plan, it seems unlikely that WB would make large deals with them.
ReplyDeleteThese guys don't go on TV unless it serve a purpose for them. If it was just re-insurance, it is pretty straight forward. It is a transactional deal. Since there are other competitors in the re-insurace business, they are just going to do this at the best price possible and be done with it.
I am thinking that they are trying to do something deeper like a partnership or equity stake. Jain getting on TV have something to do with this. Certainly ABK is a potential candidate for this and whoever got on board, assuming the dilution is small, would certainly benefit from having ties with WB and his deep pockets, to the detriment of the other monolines.
Certainly, gaining market share overall and expertise ASAP would be much more important objectives for WB than wringing the last dallar out of a deal. But in the longer term, it is better to have a partnership with one or two companies as they well know that the storm will pass. Unless there is deeper, longer term ties, they could be left out in the cold when the times are good again.
From ABK vantage point, it is very positive to have WB on board. The big question is what they price must pay for this.
It is going to be interesting to watch for the coming weeks.
John
Ajit Jain
ReplyDeleteJain
Thumbing thru various articles, Ajit Jain is not a conservative fly-by-night. And, surprisingly, despite his folksy demeanor, neither is WB. I guess we all forget that.
ReplyDeleteBerkshire's homegrown insurance group offers a variety of property-and-casualty coverage in certain U.S. markets. But its chief business is a high-risk, high-reward specialty that Ajit Jain developed over the past decade in reinsuring 'super-catastrophes''--earthquakes, hurricanes, floods, and such. Buffett found the economics of ''super-cat'' seductive: Berkshire has made at least $865 million pretax in underwriting profits since 1991. But it was the complexities of analyzing super-cat risk that hooked him. Says Jain, 47: ''Warren and I might have had a 30-second conversation or a 30-minute one, but he has been involved in every piece of business I have done.''
Good thoughts by both of you...
ReplyDeleteNeanderthal I know you are optimistic of an equity stake by Buffett but I see that as low probability (I'm talking about a straight equity deal; I think convertible bonds and the like are a different story). The problem I see is that Buffett doesn't like derivatives and he will have a hard time understanding Ambac's CDO exposure.
Having said that, Ajit Jain may have no problems with an equity stake. He is into more risky stuff and I'm sure his mega-catastrophic insurance stuff is just as unpredictable as the monoline structured product insurance.
If I'm not mistaken, Ambac can tap into an $800 million preferred share offering so that may be a part of the package. Given that MBIA issued some subordinate equity-type note, Ambac may issue convertible bonds. I think Buffett may like convertible bonds since he has used them before in similar distress situations (eg. Gillette, Level 3 Communications, etc). Buffett doesn't understand technology so who would have thought that he would buy Level 3 Communications bond?
I know I'm contradicting myself (saying he doesn't like derivatives and then saying he may take a position) but it will come down to specifics. I think a convertible bond (or something like what MBIA did) is the most probable outcome.
We're getting close to crunch time, i.e. where Ambac will need to announce a capital plan. The co. still has not announced earns release date, but will probably be Jan 31.
ReplyDeleteWe'll have to see if ABK pre-announces, as MBI did yesterday, and combines that announcement with the new capital plan.
Hopefully, they will not, which would indicate comfort with current analyst estimates of 1.72 (down from 1.96 a few weeks ago). Given the stock action I would be surprised if they DID NOT pre-announce. We'll see.
The media is in a full court hammer press on MBI, ABK.
Jim Cramer has been on the air non-stop blasting away. Ackman was on Bloomberg TV this morning declaring bankruptcy for MBI.
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ReplyDeleteSorry.. don't know what the surety bonds are...
ReplyDelete