On 6th October, it was announced that Berkshire Hathaway had become the largest shareholder in Cattolica Assicurazioni, an Italian insurance company. With a 9% stake, Warren Buffet became the largest shareholder in the company, acquiring the shares at €7.35 apiece, with a total investment worth €15.767.793. Those shares were previously owned by Banca Popolare di Vicenza. When the Milan Stock Exchange opened the following Monday, Cattolica’s stock price was already up 20%, opening at €8.54. On the last trading day of this week (13th October) the stock closed at €9.10.
It may sound strange to hear that Buffet has invested in an Italian insurance company as this is a very volatile sector in one of the most unstable economies in the world. Usually, Buffet’s most successful investment strategies are based on good returns with low risk, mainly focused on sectors characterised by products sold daily. However, it is also true that Buffett is not new to investments in the insurance sector. In fact, one of his first investments back in 1951 was GEICO, a low-cost car insurance company operating in the US, and, through the years, they have invested in many insurance companies all around the world.
Nevertheless, the reason behind this investment is still unclear at the moment. A first problematic issue is represented by the cooperative structure of the company, which grants a single vote right to each shareholder, independently from the number of shares he or she owns. This may imply a potentially big difficulty for Buffet to have access the management of the company, making it less likely to see The Oracle of Omaha managing Cattolica Assicurazioni.
The Italian Insurance Market
According to the 2016 Ania’s report on the Italian insurance market, Cattolica Assicurazioni is a company operating in a market slowly recovering from the 2008 financial crisis. Although the non-life insurances sector has not fully recovered to the pre-crisis level, the life insurance sector has been slowly growing in the recent years. Cattolica’s main market is in the non-life insurances, and they own a 5,3% in a market in which the first five companies own the 71% of the total market share.
Banco BPM is currently looking for a partner in its banking and insurance operations to take the place of Aviva and Unipol. At the moment bids have been already presented, and the main players in this rush are known to be: Generali, Aviva, Covea and Cattolica. This agreement with Banco BPM will ensure a ten years contract, with the option for additional five years, hence representing a good business opportunity for the upcoming decade. At the moment, the name of Banco BPM’s future partner is extremely unpredictable, but Cattolica seems the most likely. According to the PwC’s report on the Italian assurance market, the main distribution channel is banks, selling the 70% of life insurances and the 81% of non-life insurances. According to this data, the bank assurance model is still essential for the profitability of an insurance company in the Italian market.
Berkshire Hathaway’s investment in an Italian insurance company sounds rather strange. Cattolica Assicurazioni works in a market with low ROE and low growth, owning a good market share in non-life insurances. Warren Buffet’s investment in Cattolica Assicurazioni involves two constraints: the first problem is the cooperative governance system, which makes it difficult to participate in the management of the society. The second issue is the high reliance and exposure to the decision of Banco BMP’s next insurance partner, a nominee that may ensure higher profitability in the next years. For these reasons, it is very difficult to forecast what the outcome of this investment might be, alongside the general influence of Warren Buffet on Cattolica Assicurazioni and, more generally, in the Italian market.
Whatsapp Launches New Venture Aimed at Businesses
Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.
This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.
Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.
Amex: Troubled Credit Card Company Reports $1.2bn Net Loss
On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.
Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.
For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.
In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90. JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.
“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.
American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.
Tencent Extends Facebook Lead
Tencent has shot past Facebook to become the world’s most valuable social network.
Editor’s Remarks: Although Tencent briefly overtook Facebook in terms of market cap in November, the recent selloff of Facebook shares prompted the Chinese tech titan to regain the lead. Facebook investors responded negatively to news that Mark Zuckerberg’s plans to highlight family and friend-based content on the newsfeed would reduce the amount of time people spent on the site. Shares in Facebook have fallen 5% since that announcement, enabling Tencent to gain a $19bn lead over the US company. Tencent’s growth has been spurred on by its diversification away from its flagship messaging app, WeChat, and into video games.
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