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Warren Buffett Enters the Italian Insurance Market

 4 min read / 

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.

(Source: 2016 Ania’s report on the Italian insurance market)

 

The Reason

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.

Conclusion

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.

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