Yesterday's newsletter showed that showed that in the eleven years before Warren Buffett purchased it General Re was firing on all four cylinders, in the later years making almost £1bn in profits. It also held $14.9bn of float, which was available at apparently no cost because underwriting pricing was so good.
But would you pay $22bn for this? It seems a high price to earnings ratio, and shareholders’ equity (net assets) was just over $8bn so the price to book ratio was 2.7 times. Buffett must have anticipated some synergies that would considerably enhance profits. Shortly after agreeing to buy he described his thinking:
Berkshire, on the other hand, happily accepts volatility, just so long as there is an expectation of increased profits over time. “As part of Berkshire, this constraint will disappear, which will enhance both General Re's long-term profitability and its ability to write more business. Furthermore, General Re will be free to reduce its reliance on the retrocessional market over time, and thereby have substantial additional funds available for investment.” wrote Buffett in the Berkshire Hathaway News Release June 19, 1998.
On acquisition General Re’s common equities comprised only $4.7bn of the portfolio, less than one-fifth. Until that point it had taken a very conservative approach, placing around three-quarters of funds in bonds. This resulted in low returns compared with Buffett’s investments or those of Lou Simpson over at GEICO.
The connections between Berkshire and General Re go back a long way. In 1976, for example, General Re helped resuscitate GEICO from near-death by taking some risk exposure off its books. General Re was
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