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Once inside the Berkshire fold insurance giant General Re’s executives were encouraged to feel free of the previous constraints that limited growth. This helped to lift annual premiums from $6bn in the year it was bought, 1998, to $8.7bn in 2000 – see Figure 10.1. Buffett wanted them to continue “increasing the proportion of its business that is retained [rather than passed on to other reinsurers], expanding its product line, and widening its geographical coverage” (1998 letter).
Source: Berkshire Hathaway Annual Reports
General Re’s float was building up nicely, as were the floats of Ajit Jain’s operations at Berkshire Hathaway Reinsurance and at GEICO and Berkshire Hathaway Primary Insurance see Figure 10.2.
Source: Berkshire Hathaway Annual Reports
Buffett sounded a little worried with the “huge” underwriting loss at General Re when he reported Berkshire’s results for 1999, a total of $1.18bn, the worst in 15 years – see Figure 10.3. But said he thought it “aberrational” (1999 letter).
In contrast, GEICO reported an underwriting profit of $24 thus supplying float for Buffett to use at better than zero cost. Primary insurance also produced a profit, at $22m, so again Berkshire was paid for holding and investing other people’s money. The 1999 underwriting loss at BH Reinsurance of $251m sounds a lot but it was only 4% of its float compared with the US government 10-year bond rate of 6.7%, and so was relatively cheap float for Buffett to employ. General Re’s float cost, on the other hand, was 7.8% of float in 1999.
Source: Berkshire Hathaway Annual Reports
Although seeing worrying signs at General Re, for example writing in his 1999 letter that its business was “extremely underpriced, both domestically and internationally”, Buffett maintained that General Re had “the distribution, the underwriting skills, the culture, and — with Berkshire’s backing — the financial clout to become the world’s mos
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