For nineteen years Berkshire had enjoyed dividends flowing from its 51% stake in GEICO when it bought the remaining shares in 1996 for $2.3bn. GEICO was an exceptionally well-run primary insurer with a focus on auto policies (see earlier newsletters on GEICO). Its two key managers continued to run the business: Tony Nicely managing underwriting (until 2019) and Lou Simpson investing float (until 2010). The acquisition of GEICO immediately increased Berkshire’s total float by nearly $3bn.
In the lead up to the 1998 purchase of General Re Berkshire’s insurance operations were firing on all cylinders – see Table 1. GEICO achieved an underwriting profit in 1997 of 8.1% of premiums (underwriting profit of $281m on revenue of $3,482m), an outstanding result for the auto insurance segment.
But even that was trumped by the 32.9% 1997 underwriting profit on National Indemnity’s traditional business (it had a three-year average underwriting profit of 24.3%).
The homestate operation produced 14.1% profit (15.1% average over three years) and Berkshire’s workers’ compensation business turned in a three-year record of a positive 1.5%.
Aggregating these operations with Central States Indemnity, and Kansas Bankers Surety, in the Berkshire Hathaway Direct Insurance Group we see an underwriting gain of $53m on a revenue of $321m.
Berkshire Hathaway Reinsurance Group made a small underwriting profit, which was more than satisfactory given that it generated nearly $1bn in premiums helping to keep its float topped up to around $4bn.
Table 1. Underwriting profits of Berkshire Hathaway Insurance Business (including GEICO) 1996 - 1997
(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
(In $ Millions) (Ratio of 1 to 2)
1996 profit 6,702.0 less than zero 6.64%
1997 profit 7,093.1 less than zero 5.92%
General Re in 1998
General Re is primarily a reinsurance company with a focus on property and casualty risks based in Stamford, Connecticut, the same town where Ajit Jain had his HQ. Indeed, Berkshire and General Re had done a lot of business together over the years.
General Re was among the top three global reinsurance companies based on net premium written and capital, operating in 61 cities in 31 countries, providing coverage in over 150 countries and employing 3,869 people.
It had four divisions, but almost half of its revenue came from the North American property/casualty business and a third from international property/casualty – see Table 2.
Life and health insurance was a large business with $1.3bn of revenues, but in the context of the huge General Re this constituted only 15% of the total. The financial services division had $301m of revenue.
North American property/casualty reinsurance
Operating in the USA and Canada this division predominately wrote excess reinsurance (indemnifies the primary insurer for that proportion of the loss that exceeds an agreed amount). Casualty accounted for 57% of revenue with property another 30%. The rest was specialty (unusual coverage such as high risk behaviour like skydiving) and surplus lines (high limit and hard-to-place risks).
International property/casualty reinsurance
In 1994 General Re, Germany, became much more international with the acquisition of 75% of Cologne Re expanding its operations to 29 counties and providing cover in over 150. The majority of business was reinsu
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Prof. Glen Arnold
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