Where Buffett Has His Money Now

One word: asbestos. How the world’s most famous investor is playing a loosely regulated market.

Despite some rocky days in the market recently, no figure has emerged from the 2008 presidential campaign with more gilding than Warren Buffett. “Obviously the powers of the treasury secretary have been greatly expanded,” Tom Brokaw said to Senator John McCain during the first presidential debate. “[He is] the most powerful officer in the Cabinet now…Who do you have in mind to appoint to that very important post?” In a moment of deference and apparent weakness, McCain immediately confessed to Buffett-envy. Buffett was on the Obama team, McCain acknowledged, but he’d be delighted to draw on the legendary Nebraskan’s advice.

One thing in particular stands out in Buffett’s conduct over the last couple of years before the recent financial crisis: amassing extraordinary amounts of cash. Observers have been puzzled. What is Buffett preparing to buy? wonder BusinessWeek and The Wall Street Journal. Like any skilled investor, Buffett holds his cards close to the vest. He is not prepared to share his acquisition plans with the media. But in retrospect it’s pretty obvious that Buffett hasn’t been motivated by any specific shopping list. Rather, he has been anticipating a serious collapse of the market, putting himself in a position to step in and scoop up depressed assets when the market hits bottom.

Buffett has not only been one step ahead of the market, but also has been one step ahead of the regulators.

One of Buffett’s most intriguing and unremarked upon maneuvers has been to acquire large amounts of long-term insurance exposure relating to asbestosis litigation claims. These claims present a particular challenge to insurers, especially foreign insurers, because the exposure stretches over many decades and is difficult to value. Many of them have therefore been anxious to clear the claims off their books. But in Buffett, they’ve found one very eager buyer.

Here are just a few of Buffett’s transactions relating to asbestos claims:

• On October 20, 2006, Buffett acquired $9 billion in assets from the British insurer Equitas in exchange for an assumption of Equitas’ asbestosis-linked claims.
• In March 2007, Buffett acquired the UK business of Sampo Insurance of Japan, which is also thought to be heavy with asbestos claims.
• In January 2008, Buffett entered into a complex transaction with Swiss Re under which he acquired 20 percent of the company’s property and casualty insurance for the coming five years. He also went into the market to acquire a 3 percent stake in Swiss Re directly. Transactions of this sort are often a trial run for a future acquisition.
• On January 9, 2008, Reuters reports that Buffett had acquired $5 billion in connection with a deal from Bermuda-based St George Re under which he would assume their asbestosis exposure.

In the business press, these immensely complex transactions were largely reported as an expansion of Buffett’s impressive international reinsurance business. Most press accounts focused on the assumption of liabilities. There is nothing inaccurate about that characterization, but it is only half of the ledger sheet. The transactions could just as easily be viewed from the perspective of the assets Buffett was acquiring. Indeed, he “simplified” the Equitas transaction in these terms in a letter to Berkshire-Hathaway shareholders: “We said that if Equitas would give us $7.12 billion in cash and securities, we would pay all of its future claims and expenses up to $13.9 billion.” The benefit the transaction brought to Buffett was, as he properly stressed, the collection of cash, which he would have to reinvest. The offsetting obligation to pay claims is contingent, unfixed and off on the horizon. The same strategic objective appears to have been realized in the other major transactions.