Buffett eyes Royal Bank of Scotland insurance unit

May 04

Breaking news and Ideas

Add

Buffett will look at RBS insurance unit

Berkshire unit buys subprime mortgages, freezes resets

By Alistair Barr, MarketWatch

Last Update: 7:28 PM ET May 4, 2008

OMAHA, Neb. (MarketWatch) — Berkshire Hathaway will consider investing in the
insurance business of U.K. banking giant Royal Bank of Scotland and is close to
buying a medium-sized company in the country, Chairman Warren Buffett said
Sunday.

A Berkshire unit(BRKA)(BRKB) has also bought portfolios of subprime mortgages and
has frozen resets that were due to send interest rates on those loans higher,
Buffett reported.

Still, the billionaire investor warned that housing market weakness isn’t over
yet and predicted more losses for banks, while noting that the U.S. is in a
recession.

Buffett and Vice Chairman Charlie Munger were speaking at a press conference a
day after 31,000 Berkshire shareholders flooded into Omaha, Neb., eager to hear
how the credit crunch is affecting Berkshire’s businesses, the stock market and
the economy.

Since mortgage delinquencies and foreclosures began surging last year, house
prices have slumped more than 10% across the U.S. The stock market is down about
9% from its peak and corporate bond spreads have ballooned — a measure of rising
risk aversion. Financial-services companies have lost a quarter of their market
value.

Some Berkshire investors said before the annual meeting that the crisis could
provide Buffett with interesting acquisition opportunities, helping the company
to put some of its huge cash pile to work.

Buffett said on Sunday that Berkshire will consider buying the insurance
businesses of Royal Bank of Scotland Group PLC (RBS)(UK:RBS), one of Europe’s
largest banks.

Like other big banks, RBS is trying to boost its capital after being hit with
billions of pounds of losses from the credit crunch.

The bank also said in April that it’s considering selling its insurance business.
The unit, which includes Direct Line and Churchill, could be worth five billion
to eight billion pounds, analysts estimate.

If Buffett tries to buy the business, he would be competing with other bidders.
The chairman of Italian insurer Generali SpA said his company would consider
buying it.

Berkshire is also close to acquiring a medium-sized U.K. company, Buffett said.
He didn’t give many more details, but noted that Berkshire owns a utility in the
U.K., Northern Electric.

Resets frozen

Clayton Homes, a Berkshire unit that makes and provides financing for
manufactured homes, has bought portfolios of subprime mortgages and has frozen
resets that were due to send the interest rate on those home loans higher,
Buffett also reported on Sunday.

After Clayton purchased the subprime mortgages, the company sent letters to all
the borrowers involved telling them the interest rates will not be reset higher,
Buffett explained.

Even though the contracts allow Clayton to increase the interest rates on the
loans, the rates won’t change, he added.

“We’re not in the business of resetting mortgages higher,” Buffett said.

Despite increasing exposure to such risky mortgages, Buffett still expressed
concern about the outlook for the housing market and the U.S. economy.

Residential real estate markets in Nevada, California, Arizona and Florida have
been hit the hardest, but trouble in those states has a “mild contagion effect,”
across the whole U.S., Buffett explained.

Buffett said he sold two residential units in San Francisco about two years ago.
The real estate agents wanted him to list one of the properties for $995,000, but
Buffett listed it above $1 million and it sold for $1,750,000 in one day, the
billionaire recalled.

“There were 20 buyers that day,” Buffett said during a press conference. “That
wouldn’t happen now — it wouldn’t happen in San Francisco today.”

“It’s not over yet,” he concluded.

Bank losses

Banks will suffer more losses over the next few years from the real-estate crisis
despite the Federal Reserve’s successful efforts to prevent contagion in the
financial system, Buffett also predicted.

“The action of the Fed in terms of Bear Stearns (BSC) prevented contagion where
there may have been more bank runs on the investment banks,” he said. “That
doesn’t mean the losses are over by a long shot. There’s going to be more pain.”

“We’ve looked at several of the investment banks where it’s clear more losses are
to be taken,” he added.

The size of future losses depends on the outlook for the economy and the housing
market, he explained.

Listings of homes for sale in some areas of the country, such as Broward County,
Fla., are up a lot from last year, Buffett noted.

“That will work its way out,” he said, stressing that it’s difficult to know how
long that will take.

Berkshire owns a big stake in Wells Fargo Co. (WFC), one of the largest mortgage
lenders in the U.S., and holds shares of other banks such as US Bancorp (USB).

“Wells Fargo is going to have above average losses as will other banks on things
that relate to real estate over the next few years,” Buffett said.

Berkshire is not selling its Wells Fargo shares though, he noted.

The U.S. economy is currently in a recession, despite official data and
definitions to the contrary, Buffett said.