Is This a Black Eye for Buffett?
On Thursday, Zurich-based Swiss Re announced through a press release that it has settled a dispute with Warren Buffett's Berkshire Hathaway over a previous retrocession agreement between the two companies. That agreement, which was concluded in 2010, involved a group of renewable term-life insurance policies sold in the U.S. before 2004.
And, yes, this is the same Swiss Re that, in 2009, sustained heavy losses on risky derivatives investments, to which Buffett himself had so famously referred as "financial weapons of mass destruction." In the end, Berkshire ended up saving Swiss Re's bacon by eventually loaning it more than $3 billion -- and, might I add, on fantastic terms for Berkshire.
Back to the current news, last week's settlement dictates that "Swiss Re will take back some of the risks covered by the contract and will receive a payment" of $610 million from Berkshire.
This is not a black eye
In fact, Buffett didn't even have to put on his gloves to end this fight. While it may initially seem like he's taking an uppercut on the chin here, remember Berkshire is the one who started this fight -- and it just so happens to know how to handle itself pretty well.
For some background, note the dispute surfaced just last November, when Berkshire alleged damages of between $0.5 billion and $1 billion, saying Swiss Re's assumptions used to write the original policies were too optimistic. This, in turn, led Berkshire to lose money on the arrangement.
Of course, Swiss Re was quick to state the allegations were without merit, but also noted they had met with Berkshire to discuss the claim, as "failure to resolve the dispute could lead to arbitration proceedings."
Of course, it's a safe bet neither company wanted that to happen, but why exactly is Berkshire now paying Swiss Re $610 million to settle?
Dig a little deeper, and you'll see the key lies in those aforementioned risks Swiss Re agreed to "take back" in exchange for the money. What's more, the settlement also lowers Berkshire's liability for the retrocession agreement, reducing the original limit of $1.5 billion to a new level of $1.05 billion.
Sure enough, after noting the settlement would lead to a first-quarter gain for Swiss Re of approximately $100 million, the company included the following toward the bottom of its release:
The effect on Swiss Re's performance beyond the first quarter of 2013 as a result of the agreement reached with Berkshire Hathaway will depend on the performance of both the recaptured business and the business that remains covered by the original retrocession agreement. Prior to recapture, the treaties have been producing losses. This may continue until the performance improves or steps are taken to mitigate the causes of the losses. There is no assurance that the payments received from Berkshire Hathaway will be sufficient to cover future losses.
Foolish final thoughts
All in all, when we couple the above language with the settlement terms, as well as the fact Berkshire initiated this conversation in the first place, it's a safe bet the Omaha-based conglomerate expects those "future losses" to increase. In the end, while neither company really "wins" in this situation, I think the future will prove Berkshire got the better end of the deal.
Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!
The article Is This a Black Eye for Buffett? originally appeared on Fool.com.Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.