Berkshire Hathaway

[greengiraffe]

China buyers like Buffett

1095 words
4 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Star power Investors from a state-controlled economy flock to the 'Woodstock of capitalism', writes John Kehoe.

When the 15 Chinese nationals boarded a domestic flight in the United States on Friday, their travel itinerary did not list visiting the White House in Washington, nor climbing the Empire State Building in New York, nor rubbing shoulders with stardom along Hollywood Boulevard in Los Angeles.

The neatly dressed Mandarin-speaking men and women from Shanghai were transiting out of Detroit bound for the usually sleepy city of Omaha in the US mid-west to catch a glimpse of another American icon, Warren Buffett.

"I heard many people talk about Buffett," said 29-year-old tour guide Xinyu Guan, seated on the plane before takeoff. "They told me about the money. Many people want to be him and we can listen to him speak and maybe we learn."

The Berkshire Hathaway annual shareholder meeting may be the Woodstock of Capitalism, but it is fast attracting a cult of investors from state-controlled China which is flirting with elements of the American market model.

Alongside a few dozen Australian investors, up to an estimated thousand Chinese visitors were among more than 40,000 Buffett devotees. They queued before sunrise outside a basketball arena on Saturday to watch the world's most successful investor appear at Berkshire's 50th anniversary meeting.

Until just a few years ago, barely any Chinese attended.

Chairman Buffett, 84, and his 90-year-old business partner Charlie Munger, appeared for eight hours in a part rock concert, part comedy duo act, answering questions from investors and journalists.

Oliver Stevens, a former Perth stockbroker and confessed Buffett fan who made the trip from his temporary home in France, said, "There's only one Warren Buffett".

"He's Like the Don Bradman of investing," Stevens says over a beer at the Doubletree Downtown Hilton in downtown Omaha.

"He's the Babe Ruth [baseball legend]," interjects fellow Australian financial planner Stephen O'Halloran. "Fifty years of track record is phenomenal; it will never be repeated."

Buffett has amassed a personal fortune of $US70 billion ($90 billion) and Berkshire's annual report says the conglomerate's market value of $US354 billion has soared by 1,826,163 per cent since Buffett took over a struggling textile mill in Massachusetts in 1965. For an original shareholder, $US1 invested half a century ago would be worth $US18,261 ($23,250) today.

Berkshire privately owns outright nine of the most valuable 500 US companies and has large stakes in publicly traded firms including The Coca-Cola Company, bank Wells Fargo, computer giant International Business Machines, credit card provider American Express and retailer Wal-Mart stores.

It's little wonder Chinese and other foreign investors hope to get rich by listening to the Oracle of Omaha.

About eight years ago when O'Halloran first made the annual pilgrimage from Melbourne, he was one of only about 100 overseas guests.

On the ground at The CenturyLink Centre and surrounding events, The Australian Financial Review came across Australians from Auscap Asset Management, Blue Sky Alternative Investments, Citigroup, Magellan Financial Group, Peters MacGregor Capital Management, RBS Morgans, BKI Investment, Treadstone 71, Washington H Soul Pattinson and Teaminvest.

Despite the Australian accents ringing out around the Old Market restaurants and bars on Friday and Saturday nights in downtown Omaha, they were easily outnumbered by the Chinese contingent.

Stevens say he drove past the billionaire's modest home on Friday, spotting about 15 to 20 Asian tourists camped on the nature strip taking photographs.

"You wouldn't barely have seen any Chinese here five years ago," O'Halloran adds. "But now ... "

The Chinese groups booked out private dining rooms at the local Chop House, ate at Buffett's favourite Italian steakhouse Piccolo's and visited the Berkshire headquarters on Farnam Street. The cashed-up visitors shopped till they dropped at the exhibit hall selling Berkshire paraphernalia such as "Berky" boxer shorts, Coca-Cola memorabilia cans and Brooks running shoes. Berkshire holds big stakes in the companies.

At the event Buffett was asked publicly by a Chinese man, who spoke broken English, if it was wise to apply his famous long-term value-investing philosophy to the volatile Chinese sharemarket, which has doubled in value over the last six months. Many fear it could crash.

"I would invest in China or any place else ... [and] I would apply exactly the same sort of principles," Buffett counselled.

"The more people respond to short-term events, anything that causes people to get wildly enthusiastic or wildly depressed, it actually allows you to make lots of money."

The business magnate told the investor, and doubtless hundreds of other Chinese in the stadium listening intently, to think of stocks as a small piece of a business, believe that market fluctuations are a benefit, and focus on firms with a competitive advantage over five to 10 years.

A Chinese translator relayed Buffett's messages in a hotel across the street to a couple of hundred Chinese people watching video footage.

Daniel Lee, managing director of the Shanghai Strategic Investment Management Co, travelled for the one-day meeting hoping to gain investing insights from Buffett. He was accompanied by China-US Chamber of Commerce assistant Evelyn Peng, a Chinese national now based in New York.

A few dozen Australians were among the throng of international disciples who flew halfway around the globe to be at the all-day master class from Buffett, as Berkshire director and Microsoft founder Bill Gates watched on from near the main stage.

Wayne Peters, head of Peters MacGregor Capital Management and an 18-year veteran of the Berkshire meeting, says coming to Omaha in the state of Nebraska is all about learning from "two of the smartest people in the world".

"You just can't but help improve your thinking when you spend time with people brighter than yourself," he says.

Mark Sowerby, founder of ASX-listed fund manager Blue Sky Alternative Investments, says he was less interested in Buffett's investing tips and listened more carefully on how to build a long-term investment business that is trusted.

"I'm looking at it as a business owner and looking at the things they've done over 50 years from going from a small investor to the biggest investor in the world," says Sowerby.

"To get that level of trust and conviction they've got with their investors, that takes time, to the point they've almost got a football team running with them."


Fairfax Media Management Pty Limited

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[greengiraffe]

Behind Buffett's new investing fetish
584 words
11 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Warren Buffett is putting his money where his mouth is. Or, not putting his money where his mouth isn't.

The Berkshire Hathaway chairman recently admitted sharemarket valuations are pricey and bonds even more expensive. So he has to consider other investments to grow the firm's $US530 billion ($670 billion) portfolio.

An analysis of Berkshire's cash flows for the past 20 years conducted by shareholder and chartered financial analyst James Harris reveals that the Oracle of Omaha has lately been investing in a quasi new asset class; capital expenditures for existing investments.

I bumped into Harris on the sidelines of the Berkshire Hathaway annual meeting in Omaha. He walked me through his spread sheet.

Berkshire last year reinvested 29 per cent of its net cash flow in net capital expenditures - an all-time high since at least records dating back to 1996 and probably far longer. It's more than double Berkshire's average 14 per cent net capex as a share of net cash flow.

Harris says the trend is a "clue of what Buffett thinks about the markets".

Judging by their recent admissions, Buffett and Federal Reserve chair Janet Yellen (not a noted stock picker), see frothiness in equities. The Shiller price/earnings ratio of 27 is well above its long-term average of 16.6. On a simpler P/E ratio, the S&P 500 is trading at about 18 times trailing earnings, above the long-term historical P/E ratio of about 16.

Berkshire has amassed a cash pile of more than $US64 billion, double five years ago. Just like 1998 when Buffett shifted $US8.7 billion out of stocks before the tech bubble burst, could he be opportunistically hoarding cash for a market correction?

The investment firm spent $US4.8 billion on new businesses last year, well below the value of acquisitions in the previous four years. Private equity competition for firms is intense, as low interest rates and a lack of high-yielding assets bid up prices for alternative investments.

In the fixed income space, Berkshire has recorded negative flows for the last five years. Although a savvy Buffett piled into bonds before the 2000 tech wreck and the 2008 financial crisis, he has traditionally avoided bonds due to inflation risk and high tax burden.

The billionaire appears to be finding better value in upgrading capital items in Berkshire's existing portfolio.

For the past three years Berkshire has poured funds into power plants, transmission lines, solar energy, rail locomotives and infrastructure, including Berkshire Hathaway Energy and Burlington Northern Santa Fe, the operator of one of America's largest freight networks, which it paid $US26 billion for in 2010.

United States infrastructure is deteriorating as Washington fails to pass funding for roads, rail and port upgrades, but Buffett is reinvesting in America.

Even allowing for depreciation, the conglomerate tipped $US7.8 billion into net capex last year, up from $US1.7 billion in 2010.

Remarkably, that outweighs the $US5.9 billion combined of net equity and new business purchases.

"These are staggering large investments in capital expenditure," Harris says.

In Buffett's own words, it would not always be his preferred allocation.

"A business with high capital investment is a bad business to be in during high inflation, and often not a good business to be in generally," Buffett told shareholders.

But it may be a sign of how Buffett views the prices of other asset classes.


Fairfax Media Management Pty Limited

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[specuvestor]

I think this figure is skewed by the Burlington capex which was plagued by insufficient upgrading before buffet took over

[CityFarmer]

Buffett increases Wells Fargo, US Bancorp, IBM holdings

(May 18): Berkshire Hathaway increased its holdings in some of billionaire Chairman Warren Buffett’s favourite companies in the first quarter, including Wells Fargo & Co and International Business Machines Corp.

Berkshire also added to its stake in US Bancorp, according to a regulatory filing last Friday detailing its US stock portfolio as of March 31.

Buffett’s deputies pared holdings in stocks including National Oilwell Varco.

No new companies were listed in the portfolio.

While Buffett is widely known for his skill at picking stocks, the investment portfolio at Berkshire has become less important over time as the company shifted toward buying whole businesses.

Equities have also gotten more expensive. The Standard & Poor’s 500 Index is on pace to increase for its 10th straight quarter.

“If there are no screaming buys out there, there’s not much for him to do,” Gregg Warren, an analyst at Morningstar, said in a phone interview.

Buffett boosted his IBM holding by 3.4 percent to 79.6 million shares, bringing the stake to US$12.8 billion at the end of the first quarter.

He said at Berkshire’s annual meeting this month that he had added to the IBM stake despite its revenue slump, without saying how many shares he acquired.

The Wells Fargo investment climbed by 1.5 percent to 470 million shares and was valued at more than US$25 billion at the end of March.

The US Bancorp stake rose by 4.6 percent to 83.7 million shares and is valued at more than US$3 billion.
...
http://www.theedgemarkets.com/sg/article...m-holdings

[greengiraffe]

http://www.smh.com.au/business/warren-bu...hpce8.html

Warren Buffett eyes more Australian deals, targets banks
Date
June 16, 2015 - 7:21PM
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James Eyers
James Eyers
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Warren Buffett delighted with IAG deal
It may have take Warren Buffett to the age of 84 to have the wisdom to invest in an Australian company, but he feels it was worth the wait.
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IAG in $500 million deal with Buffett's Berkshire Hathaway
Malcolm Maiden: IAG's deal with Warren Buffett is a major coup
The world's best known investor, Warren Buffett, says his deal with Insurance Australia Group will be followed by others in Australia and he is looking to buy an equity stake in at least one of the banks.

One of the globe's most astute investors over several decades, Mr Buffett said the IAG deal announced on Tuesday will deliver a stream of Australian dollars to his Berkshire Hathaway investment conglomerate, and he wants to deploy that capital into the Australian equity market.

Warren Buffett is famous for his disciplined, conservative and long-term approach to investing.
Warren Buffett is famous for his disciplined, conservative and long-term approach to investing.
"If you come back in two or three years, you will find we have got four or five Australian equities," he told Fairfax Media in a phone interview from Omaha in the United States.

Asked for his thoughts on the Australian banking sector, Mr Buffett said: "Banking is something I have looked at, I am comfortable with banks, we have some big positions in US banks. I will certainly be looking at the banks [in Australia].

"In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks."

The banks followed IAG higher on the sharemarket Tuesday; ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp were all trading up more than 1 per cent mid-afternoon.

Tuesday's IAG deal will provide Berkshire Hathaway with 20 per cent of IAG's insurance premiums for the next decade, and Berkshire Hathaway will pay 20 per cent of its claims. Berkshire will also take a 3.7 per cent stake in IAG via a $500 million placement.

"The [premium] money is going to get invested in Australia," Mr Buffett said. "I like the first $500 million we have put to work. But I have got to look at the whole market, because we will be investing more money in marketable securities in Australia for some years to come."

The consumer goods sector was also attractive but Mr Buffett said he was not inclined to invest in resources because commodity prices are too hard to predict.

Mr Buffett is famous for his disciplined, conservative and long-term approach to investing. His strategy involves looking for businesses where he understands the basic economics, trusts senior management, and can buy at a reasonable price.

"There is money to be made in Australian equities over the next 10, or 20, or 30 years," he said. "If we get something we feel comfortable with, we will stick with it for a very long time."

[specuvestor]

Like i posted some time back, I would encourage my children to study business/ finance in Australia if they are keen as they seemed to have been able to train up strong business leaders and banking executives as well as central bankers

But the sector is not cheap so Buffett is buying good companies at fair prices

[greengiraffe]

http://www.theage.com.au/business/bankin...NTE2MDg1OA

Warren Buffett plans $2 billion a year Australian spending spree
Date
June 17, 2015 - 12:15AM

James Eyers
James Eyers
Senior Reporter
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Warren Buffett delighted with IAG deal
It may have take Warren Buffett to the age of 84 to have the wisdom to invest in an Australian company, but he feels it was worth the wait.
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IAG in $500 million deal with Buffett's Berkshire Hathaway
Malcolm Maiden: IAG's deal with Warren Buffett is a major coup
Legendary investor Warren Buffett has at last locked his gaze on Australia and will now take charge of a $2 billion war chest for investment here each and every year.

Mr Buffett, the head of investment conglomerate Berkshire Hathaway, will use funds from a newly minted deal with Insurance Australia Group to build up equity stakes in other large Australian companies including at least one bank.

Warren Buffett plans to invest $2 billion a year in Australia.
Warren Buffett plans to invest $2 billion a year in Australia. Photo: Nicholas Kamm
One of the globe's most astute investors over five decades, Mr Buffett said the deal announced on Tuesday would deliver a stream of Australian dollars which would be invested locally to avoid currency risk.

The investments in the Australian equity market will ensure future insurance liabilities are matched in the local currency.

"If you come back in two or three years, you will find we have got four or five Australian equities," he said.

Banks will be among his targets, Mr Buffett told Fairfax Media in a phone interview from his home town of Omaha in the United States.

"Banking is something I have looked at. I am comfortable with banks. We have some big positions in US banks. I will certainly be looking at the banks [in Australia]. In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks," he said.

Wayne Peters, head of PetersMacGregor Capital Management and an 18-year veteran of the Berkshire annual meeting in Omaha, said the valuations of Australian banks will need to retreat before Mr Buffett buys into the sector, given his renowned discipline around price.

"He will be trying to match the currency with the insurance exposure, which is why he would be considering Australian equities. But he will definitely not overpay. I would be very surprised if he took positions in the banks now," Mr Peters said.

Berkshire Hathaway owns almost 10 per cent of Wells Fargo in the United States and has made huge returns on an investment in Bank of America at the depths of the global financial crisis.

Australian banks remain expensive: the sector is trading on a forward price-earnings multiple of 12.6 times, higher than its 11.9 times four-year average but down from 14 times in April before the sector de-rated, according to Credit Suisse. Australian banks followed IAG higher on the sharemarket Tuesday, with the big four banks up about 1 per cent.

The IAG deal will provide Berkshire Hathaway with 20 per cent of IAG's insurance premiums for the next decade and Berkshire Hathaway will pay 20 per cent of its claims.

Berkshire will also take a 3.7 per cent stake in IAG via a $500 million placement.

On a conference call with IAG chief executive Mike Wilkins and chief financial officer Nick Hawkins on Tuesday, analysts questioned whether the deal would reduce IAG's margins and dilute earnings per share.

But Mr Buffett said in the interview the deal would not be dilutive on a per share basis "in two, or three or five years".

IAG's gross written premium in 2014 was $11 billion, meaning Berkshire will receive $2.2 billion a year from the deal.

"The [premium] money is going to get invested in Australia," Mr Buffett said.

"I like the first $500 million we have put to work. But I have got to look at the whole market, because we will be investing more money in marketable securities in Australia for some years to come."

As well as financial services, Mr Buffett said the consumer goods sector was attractive but he is not inclined to invest in resources because commodity prices are too hard to predict.

Mr Buffett is famous for his disciplined, conservative and long-term approach to investing. His strategy involves looking for businesses where he understands the basic economics, trusts senior management, and can buy at a reasonable price.

"There is money to be made in Australian equities over the next 10, or 20, or 30 years," he said.

"If we get something we feel comfortable with, we will stick with it for a very long time."

Mr Buffett said his investment approach did not involve analysis of macroeconomic forces, but "I do know that five or 10 or 20 years from now, both the United States and Australia are going to move forward, real per capita household income and GDP is going to increase."

"I can't predict the ups and downs, but there will be more ups than downs."

Berkshire is sitting on about $US65 billion of cash, an amount growing by about $US8 billion each quarter. The firm has been investing heavily in infrastructure including power plants, transmission lines, solar energy and rail locomotives.

Mr Peters said the IAG deal "sends a very clear message to the market place that Berkshire will be deploying capital in Australia".

[greengiraffe]

http://www.smh.com.au/business/markets/w...hpnu3.html

Which Australian stocks will Warren Buffett buy?
Date
June 17, 2015 - 6:40PM
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Jonathan Shapiro
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What Aussie stocks could Buffett buy next?
If you're wondering what might be the next Aussie shares in Warren Buffett's sights, his investment principles give a few hints.
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Every May legions of Australian investors make the pilgrimage to Omaha to hear the wisdom of Warren Buffett. Now Buffett is coming to Australia.

After Tuesday's $500 million deal with insurer IAG, Buffett will deploy Berkshire's $2.2 billon annual share of the insurer's gross written premiums in the Australian stock market.

Naturally, speculation is rife about which ASX-listed companies will enjoy the ultimate stamp of approval – the presence of the name Berkshire Hathaway on the share register.

Warren Buffett didn't become the greatest investor of all time by using screens.
Warren Buffett didn't become the greatest investor of all time by using screens. Photo: Nicholas Kamm
The "Warren Buffett Way" of investing has been the subject of countless books, seminars and academic studies, so there are plenty of insights available about how he might go about-stock picking in Australia.

In the quest to front-run the most legendary investor of all time, the first step is to screen for stocks that meet Buffett's rigid criteria.

Berkshire typically seeks to invest in companies that have healthy and sustainable profit margins, and are able to grow their earnings. Mr Buffett looks towards companies that have low debt and a track record of returning capital to shareholders. And they must be affordable.

There are none in Australia that meet all of these requirements. But if we relax the assumption, a few names emerge.

Surprising results
Screening for Australian companies with market capitalisations of over $1 billion that have a net profit margin that has averaged over 20 per cent over five years, and have consistently grown their earnings per share over that period, produces some surprising results.

The big four banks all make the grade, by virtue of their high profit margins and growth in earnings. So too does Bendigo and Adelaide Bank. And if Buffett gets his act together in time he may even want to participate in Westpac's sale of BT Investment Management shares, which meet the criteria.

Would Buffett buy the banks? Most Buffett watchers think not at current valuations. Australia's banks trade at a book value of almost three times, well above JP Morgan (a personal favourite of Buffett's) at 1.4 times and Berkshire's largest holding, Wells Fargo, at two times.

But they do have those great competitive moats he loves so much. What could get Buffett exited is a banking crisis. He's provided emergency capital to United States financials Goldman Sachs and Bank of America on great terms and may do the same if the banking disaster the New York hedge funds predict, ever eventuates.

Other stocks that survive the screen include two oil stocks – Oil Search and Woodside. But Buffett sold his big oil stock ExxonMobil in February, so that may be a clue he won't be interested.

Miner BHP is on the list too, as are New Zealand auction site TradeMe and property firm GPT.

But Buffett didn't become the greatest investor of all time by using screens.

As hedge fund manager Bill Ackman once said, Buffett's skill is not just in being able to find good companies, but to grade them. And Buffett has shown a remarkable ability to adapt his investment style and find value in a world where the information disparities that rewarded the early value investors has been eroded.

Fairfax Media asked some Buffett watchers which stocks they believe he may show interest in, given that he likes well-run companies in favourable industry dynamics, particularly those backed by assets.

A good example of Buffett's style was a 2009 investment in rail road operator Burlington Northern Santa Fe. He had previously told disciples that he avoids capital intensive businesses but the BNSF investment has provided a good way to deploy capital through expenditure to achieve good returns.

For that reason Berkshire may see similar potential in Aurizon, which was initially shunned by domestic investors but favoured by several offshore funds.

Another stock that warranted a mention was recently floated Medibank.

Even Buffett gets it wrong
Investors should be mindful that Buffett doesn't get everything right and in recent years, he's got several large cap calls wrong.

One of his most recent mistakes is particularly relevant for Australian investors. Berkshire owned 5 per cent in UK supermarket Tesco, "a big mistake" that cost him almost $US500 million ($647 million).

Tesco, once considered a safe blue chip, suffered four profit warnings and saw its earnings halved in the first half of 2014-15, down from £1.6 billion ($3.2 billion) a year earlier. Part of its downfall was the rise of discount competitors like Aldi and Lidl.

That's eerily similar to the issues Woolworths is facing as its stock has declined 30 per cent from its April 2014 peak. Many would no doubt have put Woolworths on the top of his shopping list two years ago but few would include it today.

In fact, the chatter at the sidelines of this reporter's last pilgrimage to Omaha was tinged with frustration – Buffett's ways were proving costly for devotees as they overlooked stellar stocks like Apple and Google.

Buffett is only human – but he remains more than a step ahead of us. We'll just have to show some of his characteristic patience to learn which local companies make his grade.

[greengiraffe]

Jun 17 2015 at 10:49 AM Updated Jun 17 2015 at 3:11 PM
Warren Buffett still says derivatives are 'weapons of mass destruction'

by Tony Boyd

Thirteen years after describing derivatives as "weapons of mass destruction" Warren Buffett has reaffirmed his view that they pose a threat to the global economy and financial markets.

In an interview with Chanticleer this week, Buffett said that "at some point they are likely to cause big trouble".

"Derivatives, lend themselves to huge amounts of speculation," he said.

"One thing about stocks is that with a settlement date of three business days from purchase you have a very short period of time between the commitment and when you settle up.

Warren Buffett said: "One thing about stocks is that with a settlement date of three business days from purchase you have a very short period of time between the commitment and when you settle up."
Warren Buffett said: "One thing about stocks is that with a settlement date of three business days from purchase you have a very short period of time between the commitment and when you settle up." AP
"That at least makes sure that things don't exist as a fallacy or exist on paper for years.

"When I took over the derivative operation at Gen Re which we inherited we had contracts that ran for 100 years before anybody settled up and in between people just kept marking the numbers down.

"So the amount of speculation in credit you can introduce into the system through derivatives is pretty extraordinary."

The total nominal amount of over-the-counter derivatives contracts outstanding in the world at December 2014 was $US630 trillion ($815 trillion), according to the latest statistics from the Bank for International Settlements in Switzerland. That is about eight times the size of estimated world gross domestic product of $US75 trillion.

The BIS statistics show that the bulk of the nominal value of OTC derivatives is from interest rate contracts totalling $US505 trillion.

Buffett says the trigger for derivatives trouble will be a disruption in financial markets which cannot be predicted.

"The problem arises when there is a discontinuity in the market for some reason or another.

"When the markets closed like it was for a few days after 9/11 or in World War I the market was closed for four or five months – anything that disrupts the continuity of the market when you have trillions of dollars of nominal amounts outstanding and no ability to settle up and who knows what happens when the market reopens," he said.

"That is a very dangerous situation.

"Clearing houses help but they don't solve the problem."

Buffett said he had not changed his view that derivatives are weapons of mass destruction but they still can serve a purpose.

"That does not mean they cannot be used intelligently. We use them in our utility operation in terms of hedging input costs, for some short term contracts, converting fixed to floating rates for fixed income investments and foreign exchange, they serve a useful purpose but do have that mass destruction potential.

"It's like the difference between a controlled fire and one that is uncontrolled.

"It's much more dangerous having instruments out that don't settle for years than it is to actually own equities outright where purchases have to be cleared in a couple of days."

Buffett said that if AIG, the huge US insurer rescued by the US government in 2008, "had never heard of derivatives they would have been a lot better off."

[greengiraffe]

Buffett's insurance game a win-win
Investments Ruth Liew
719 words
20 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

It's hard to find any who will say a bad word about Warren Buffett. The legendary investor is much loved for his common sense, folksy wisdom and money-making prowess.

But after shocking Australia's financial services industry by a $500 million deal with one of the country's biggest general insurers, Insurance Australia Group, more than a few pundits were asking if the Oracle of Omaha had pulled one over the boys from Down Under.

Under the terms of the deal, Berkshire Hathaway will invest $500 million for a 3.7 per cent stake in IAG. But in return, Buffett gets access to about 20 per cent of IAG's core Australian and New Zealand insurance business. While getting Buffett's stamp of approval may be priceless, more than a few analysts were wondering if the wily veteran may have got a much better side of the deal.

However, analysts and investors who reflected on the deal with AFR Weekend are prepared to concede that it could be one of those rare business gems - a potential win for both parties.

With the caveat that insurance can be a violently volatile business, the early verdict is that both companies get the chance to use the partnership to go for growth.

For Berkshire Hathaway, the deal means it will get a fifth of IAG's business under a so-called quota arrangement that will run for 10 years: the US giant will get 20 per cent of revenue from IAG's core insurance business (known as gross written premiums in the insurance game) and be liable to pay 20 per cent of claims.

IAG, along with rival Suncorp, control over 60 per cent of the lucrative personal insurance market. Berkshire would also be exposed to the commercial insurance market, which is more competitive and but still profitable.

The tie-up also means Berkshire will have approximately $2.3 billion of re-insurance placed with IAG each year, and a net fee of around $20 million for taking the re-insurance line.

"Nice, but hardly significant for Berkshire," Ross Curran, insurance analyst at Commonwealth Bank of Australia, said.

The deal will also arguably accelerate Berkshire's immediate growth plans in the Australian insurance market. The group's specialty insurance arm in Australia, led by Chris Colahan, is expected to shake up the commercial protection market after opening the doors of its offices in Sydney in April.

The business provides business lines across property, casualty, financial lines and marine cargo insurance in Australia.

But remember, insurance is a volatile game - and one year peppered with expensive natural disasters can cull an insurer's profits or revenue, potentially hurting Berkshire's plans in the medium term.

And this is where IAG's advantages comes in. For giving up 20 per cent of its insurance business, the company will get a fee based on a percentage of the premiums, trading "volatility for more certainty" in the words of IAG's chef financial officer, Nick Hawkins.

For IAG, the quota arrangement will also give the insurer a $700 million ticket to reduce its capital requirements, over four years. Andrew Adams, analyst at Credit Suisse, said the lower capital requirements will translate to a 200 to 300 basis point improvement in insurance profit margin. It will also have more affordable access to re-insurance, and an additional $500 million of equity capital.

IAG wants to grow in Asia. Having the extra capital will aid the company's plans to ramp up its exposure to its six target markets in the region, which includes China, Indonesia, Thailand, Malaysia, India and Vietnam. There is execution risk there to be sure, but the capital provides a springboard into the region.

For shareholders of IAG, which has a market value of more than $13 billion, the biggest threat from the Berkshire deal lies with share dilution. James Coghill, insurance analyst at UBS, expects an earnings per share dilution of about 5 to 10 per cent for investors after the deal.

For that reason alone, analysts and investors will remain hungry for more details about the Berkshire arrangement. IAG shares rose 3.6 per cent across the week, which underlines the verdict of most commentators - cautiously optimistic.


Fairfax Media Management Pty Limited

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