Do you think the Gen Re acquisition changed Berkshire for the better or for the worse or that it just “changed it?”
For the worst. As Buffett ultimately said:
"After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses).
This is not a popular item to discuss with BRK people. So, after a couple of early attempts, I’ve avoided talking about it. People don’t enjoy negative comments. But I did go over it with a private e-mail group of long term investors. 18 pages of quotes and data. After that, they understood so I let it be. But now I’ll speak up in answer to your question.
Folks including Bloomstran and many on our board continue to view it as a brilliant move - exchanging overpriced KO and other stock for Gen Re’s fixed income, avoiding capital gains taxes and getting fixed income to deploy. And it would have been had (a) the fixed income been reinvested and (b) especially had Buffett bought back the stock he issued in the period after the acquisition when BRK stock dropped back into the $50k range and below.
But neither happened. The sum of cash plus fixed income dropped by just under $0.8 billion in 1999 due to UW losses by GRN. Otherwise it continued to grow even with the acquisitions BRK was making. They were basically funded by earnings, some stock, and dividends from BNSF funded by debt. Gen Re had negative cumulative earnings until they quit reporting them in 2017 even though they returned to profitability - circa $250 million average 2008 to 2017 after Gen Re was “fixed.” The huge early losses overwhelmed the later smaller earnings.
Float initially grew from $15 billion to $23 billion with heavy UW losses. As they imposed discipline in the business, float slowly declined back to $18 billion in 2016, the last year reported.
Maybe the easiest way to look at it is to judge what Gen Re’s value would have to be today to match Berkshire’s growth - growth not funded by Gen Re. At 272,200 shares it would have to be worth over $100 billion. Anyone think that’s realistic?
It really is obvious upon inspection. If I exchange stock A for stock B and Stock A grows at 10% a year while stock B barely grows, the person issuing Stock A has made a mistake. Even if he bought B cheaply, the difference in growth rates make it a bad deal- just a matter of time. This is far more important than any capital gain taxes saved upon purchase.
Buffett really believed he had made an acquisition that increased BRK’s value at the time. And he was reluctant to admit that early on, even though his comments then became very negative on Gen Re until it was fixed.
The big mistake in hindsight was not quickly repurchasing the shares issued. The longer the wait, the bigger the mistake.
Those extra shares, mostly non-productive, have been a heavy added weight in Berkshire’s saddle. And the legal problems that came with Gen Re weren’t fun either. Questioned Berkshire’s ethics and some good people got sacrificed. Fortunately, we’ve gotten one back.
A final thought. Well before Gen Re I recall Buffett talking about insurance as being a bad business unless you had a niche or major competitive advantage. We have that in Ajit’s reinsurance business, Geico, and the small niche direct insurance firms. But Gen Re is basically a commodity reinsurance business - unlike its reputation prior to Buffett buying it. And he didn’t check to see if things had changed. If Gen Re has an advantage, it’s Berkshire’s financial strength. It’s not like BHE or BNSF, both commodity businesses but regulated so a return is basically guaranteed. Gen Re doesn’t enjoy that.