Brett Horn: Hello! I'm Brett Horn, Associate Director of Equity Research here at Morningstar. With the markets in this rage, it would be no surprise that Warren Buffet is living up to his mantra and then being greedy while others are fearful. It is also string of deals recently and just announced an investment like Reinsurance Company called Swiss Re this morning. Everybody have done—our analyst who covers Bill Bergman to join me and talk about what this deal means for a virtue. Bill, thanks for joining me.
Bill Bergman: Hi, Brett.
Brett Horn: So basically, what are the details of the investment?
Bill Bergman: Well, it’s a large $2.6 billion investment in a convertible note from Swiss Re at yielding 12% which is a high number for a long venerable franchise, it’s the latest really on a series of transactions that Berkshires conducted that are characterized by some common elements. There are large scale positions, he’s taking senior positions and some long venerable franchise because they have been battered in the last year with the financial markets in the economic conditions for instance. He’s had transaction also with not just financial services companies but with Harley Davidson of course recently in US—he’s getting more interested there as well.
And these investments are characterized in general by not just—he’s not just taking common equity positions, he’s taking senior positions in the capital structure. And getting higher rates at the same time which is a very, it reflects the attractiveness of Berkshires capital to the financial markets this days.
Brett Horn: Now, Swiss Re and Berkshire already have an existing relationship and makes it still maybe a little more interesting than others has done, could you talk a little bit about that.
Bill Bergman: It is interesting, well Swiss Re is a re-insurance company so as Berkshire half away and so Swiss Re is not only, they’re investing in someone who is a competitor as well as a customer of Berkshire in some interesting ways. Last year, there was a very important announcement; this is coming out of Wesco Financial which is an important subsidiary within Berkshire that Wesco would be picking up or re-insuring business of Swiss Re. It’s all for re-insurance company. Wesco has ample of capital to do that kind of thing and we may hear more about that out of Wesco in the next year ahead.
So, there are some interesting inner relationships here that that the re-insurance business and the insurance business there are a lot of—it’s not so clear cut that we have a, b, c these are all competitors competing with one another so unlike banking is you're familiar within the long syndications and others areas that the banking world isn’t so clean cut. There’s a lot of inner relationships that are important and this is not an investment just in for instance Harley Davidson Berkshire is making. Berkshire is making, this is a capital of decision that's really the one of its competitors as well as one of its customers.
Brett Horn: And are you sure that investors have any concern obviously Berkshire is to a large extent of financial company. This is a further investment in the financial company and we all know the stress, the financial system is under right now, is Berkshire doubling down and should investor be worried about that?
Bill Bergman: Berkshire has a large array of investments including financial services companies and that's one of perhaps the elements of its capital strength the diversification and its equity and other investment portfolios but having said that yes, you know, with here we have positions in recent weeks, in Goldman Sachs and general electric now effectively a bank as you’ve said in many ways. And now in turn on Swiss Re so Berkshire as in a sense it’s getting more concentrated in the investments and the financial services world but whether or not it’s something that how much concern we should have about it is another story.
I think this is more evidence, it’s bending against the wind and investing in franchise is that he believes and he has investigated to be durable ones for the long run. And getting attractive prices at the same time so I think it’s consistent with this past philosophy and one that's proved successful over the long run for Berkshire shareholders.
Brett Horn: Now, is this still big enough to have impact on our affiliation for Berkshire?
Bill Bergman: Taking a loan maybe not but as part of a series of transactions I think we’re going to be looking at the transaction that he has been making and reassessing our fair value estimate. If anything its evidence with the capital strength that we’d already been assuming in our models for our growth rates and say investment and come looking down the road but it’s possible that things are—the fact that its being segmented it’s something that could be pushing our fair value estimate higher I think upon revaluating what happened in 2008.
Brett Horn: You know is there anything in this deal that's you know these unique conclusions on the reinsurance of this one?
Bill Bergman: Well it’s interesting to contrast and compare the investment environment with the reinsurance environment. And the common lessons that Berkshire and other people independent thinking, crowd psychology and crowd following behavior tend to reflect themselves both in good times and bad in the reinsurance markets. And then ways that Buffet has written about also in the investment arena being fearful when others are greedy and greedy when others are fearful, bending against the wind is something in the long run that's prove favorable for Berkshire and his reinsurance operations as well it’s investment environment. And that's what we’re saying today, doubling down is one way to put it but on the other hand we’re also maybe seeing evidence of consistent behavior that’s proved very profitable in the long run in the past at Berkshire.
Brett Horn: Well, thanks Bill.
Bill Bergman: Thanks, it’s nice to be here.
Brett Horn: I'm Brett Horn from Morningstar, thank you for joining us.
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