34 THE WARREN BUFFETT WAY
General Re Corporation
In 1996 Buffett paid $2.3 billion to buy the half of GEICO he didn’t al-
ready own. Two years later, he paid seven timesthat amount—about $16
billion in Berkshire Hathaway stock—to acquire a reinsurance company
called General Re.^4 It was his biggest acquisition by far; some have called
it the single biggest event in Berkshire history.^5
Reinsurance is a sector of the insurance industry not well known to
the general public, for it doesn’t deal in the familiar products of life,
homeowner’s, or auto insurance. In simplest terms, reinsurers insure
other insurance companies. Through a contract that spells out how the
premiums and the losses are to be apportioned, a reinsurer takes on some
percentage of the original company’s risk. This allows the primary in-
surer to assume a higher level of risk, reduces its needs for operating cap-
ital, and moderates loss ratios.
For its part, the reinsurer receives a share of premiums earned, to in-
vest as it sees f it. At General Re, that investment had been primarily in
bonds. This, in fact, was a key part of Buffett’s strategy in buying the
company.
When Buffett acquired it, General Re owned approximately $19
billion in bonds, $5 billion in stocks, and $15 billion in f loat. By using
Berkshire stock to buy the company and its heavy bond portfolio, Buf-
fett in one neat step shifted the balance of Berkshire’s overall holdings
from 80 percent stocks to 60 percent. When the IRS ruled late in 1998
that the merger involved no capital gains, that meant he had managed to
“sell” almost 20 percent of Berkshire’s equity holdings, thus deftly side-
stepping the worst of price volatility, essentially tax free.
The only signif icant staff change that followed the merger was the
elimination of General Re’s investment unit. Some 150 people had been
in charge of deciding where to invest the company’s funds; they were re-
placed with just one individual—Warren Buffett.
Just after Berkshire bought General Re, the company had one of
its worst years. In 1999, GenRe, as it is known, paid claims resulting
from natural disasters (a major hailstorm in Australia, earthquakes in
Turkey, and a devastating series of storms in Europe), from the largest
house f ire in history, and from high-prof ile movie f lops (the company
had insured box-off ice receipts). To make matters worse, GenRe was
part of a grouping of several insurers and reinsurers that became ensnarled
in a workers’ compensation tangle that ended in multiple litigation and a