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Table 81 General Re s Revenues, Float, and Operating Pro ts
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Operating pro ts before taxes
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Year
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Revenues
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Float
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Operating pro ts as a percentage of revenues
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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total
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$ 6,905 8,696 8,353 8,500 8,245 7,245 6,435 6,075 6,076 6,014 $72,544
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$14,909 15,166 15,525 19,310 22,207 23,654 23,120 22,920 22,827 23,009 21,074
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$1,184 1,224 3,671 1,393 145 3 334 526 555 342 $6,235
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171% 141 439 164 18 00 52 87 91 57 86
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Dollar amounts in millions
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General Re: 1998 2008
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Table 81 shows that after the acquisition, General Re s oat increased from $149 billion in 1998 to $211 billion in 2008, which represents an annual growth rate of about 35 percent over the 10-year period Revenues (premiums) grew from 1998 until 2002 but have since declined Over the past 10 years, the growth in premium revenues is close to zero The operating pro ts have been volatile, and there have been some large losses We can learn several things from this The huge loss of $3,671 million in 2001 re ects the effect of the 9/11 terrorist attacks Underwriting losses from 1999 to 2002 were also large, much greater than in the years before being acquired by Berkshire Why did this happen In 2002, Buffett mentioned that the culture at General Re was such that premiums were not being written with as much discipline as they should have been Once Buffett realized this cultural problem, General Re reduced the amount of insurance being written In 2008, revenues were only 71 percent of what they were in 2002 Since the oat-to-revenues ratio is about 4 to 1, oat is not
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other people s money
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expected to decline at the same rate In 2008, oat was 95 percent of what it had been in 2002 Operating pro ts were positive during 2006 to 2008, which is a good sign Based on the rst nine months of results, 2009 was likely to be even a stronger year However, to really evaluate the quality of underwriting, it will take us another 10 years or more because losses from new policies do not surface immediately When estimating an insurance company s cost of oat, you should take a long-term view How has the General Re acquisition turned out so far From 1999 to 2008, oat increased by $62 billion, an increase from $149 billion to $211 billion However, the company incurred large operating losses during this period, also amounting to $62 billion Valuing oat dollar for dollar, the increase in the value of oat is nulli ed by operating losses There are some underwriting pro ts now, but they are not significant I approximate that Berkshire has earned just about nothing from its investment in General Re over the past 10 years The good news is that the cumulative 10-year return on the S&P 500 index from year-end 1998 to 2008 was about 13 percent Thus, if Berkshire had invested the same amount in the S&P 500 index, the results would have been even worse Buffett is optimistic about the future: General Re, our large international reinsurer, also had an outstanding year in 2008 Today General Re has regained its luster Charlie and I are certain that, with Tad [Montross, CEO], General Re s future is in the best of hands 3 Was buying General Re a mistake on Buffett s part, or is there something systemic that we can learn This episode is a good reminder that reported pro tability may not re ect reality Before the acquisition, General Re had a stellar record I studied the preacquisition 1997 General Re annual report carefully The results looked very good, and even in hindsight I could not see any prevailing culture at General Re that would lead to subpar underwriting General Re s growth in revenues was slowing, but it had recently acquired other insurance companies Its pro ts had increased steadily In general, when a public company is acquired, there is some probability of hidden problems Many of Buffett s acquisitions have been family-controlled companies My guess is that if General Re were a family-controlled rm, the cultural problem might not have occurred or would have been discovered in time to prevent the acquisition
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