It's kind of ironic, in our view, that the one company that had the wherewithal to support struggling banks during the 2008-09 financial crisis—BlackRock (BLK)—is now being considered for additional scrutiny by the Fed.
While we think a better case can be made for looking at wide-moat Berkshire Hathaway (BRK.B), which does have balance sheet risk (mostly through its reinsurance business), as opposed to the asset managers (which are not balance sheet driven, are not primary lenders and act mainly as agents for investors), we think regulators' focus on size and scale may be missing the broader picture.
In our view, companies like wide-moat BlackRock and Berkshire have come under greater scrutiny because they are giants in their industries. That said, they continue to be conservatively run, with a fair amount of cash and investments on their books, and in our view are already in a much better position than peers to deal with the stricter capital, leverage and liquidity requirements that would come with the systemically-important financial institution designation.
Unlike the asset managers, insurers hold the capital collected from their clients on their books. Most maintain fairly conservative investment portfolios, with a large portion of their capital dedicated to fixed income. While insurers do not face redemption risk like the asset managers do, the effectiveness of their underwriting influences claims experience, and more volatile credit and equity markets can put stress on their operations, with mark-to-market adjustments to the downside potentially forcing insurers to raise equity capital. Much like the asset managers, though, the implosion of a single insurance company due to poor underwriting or poor investment performance is unlikely to take down the entire industry, let alone the financial markets overall. While American International Group (AIG) did stress the system in 2008, it was due to derivatives (namely credit default swaps) it had underwritten, not its insurance operations.
We have raised our fair value estimate for Blackrock to $340 per share from $300 to reflect changes in our assumptions about the firm's assets under management, revenue and profitability since our last review.
Our fair value estimate for Berkshire Hathaway’s Class B shares is $143 per share.