Warren Buffett’s Biggest Insurance Acquisition: General Re

• Acquisition Year: 1998

• Purchase Price: $22 billion (paid in cash and stock)

• Seller: Public shareholders of General Re

• Berkshire’s Strategic Goal:

  • Strengthen reinsurance capabilities

  • Gain access to global insurance markets

  • Utilize General Re’s float for investments

• General Re’s Business Segments (1997 Revenue Breakdown):

  • North American Property & Casualty Reinsurance: $3.97 billion (48% of total revenue)

  • International Property & Casualty Reinsurance: $2.71 billion (33%)

  • Life & Health Reinsurance: $1.28 billion (15%)

  • Financial Services (Derivatives & Risk Management): $301 million (4%)

• Float Acquired: ~$24.6 billion in insurance investments

• Major Challenges Post-Acquisition:

  • Under-reserving issues in claims estimates

  • High operating expenses

  • Integration difficulties

  • Regulatory scrutiny in the 2000s

• General Re Today: Fully integrated into Berkshire Hathaway’s insurance operations​.

Buffett’s Largest Insurance Deal: Why He Bought General Re

In 1998, Warren Buffett made the biggest acquisition in Berkshire Hathaway’s history at the time—the $22 billion purchase of General Re (General Reinsurance Corporation).

Buffett’s decision to acquire General Re was strategic rather than opportunistic. Berkshire Hathaway already had several successful insurance subsidiaries, including GEICO and National Indemnity, and Buffett understood that insurance “float” was the key to compounding Berkshire’s capital over time.

General Re provided Berkshire with three major advantages:

1) A Massive Increase in Float

Float is the money an insurance company holds before it has to pay out claims. Buffett had already used float successfully in National Indemnity and GEICO to fund investments in companies like Coca-Cola, American Express, and Wells Fargo.

At the time of the acquisition, General Re had:

• $24.6 billion in investments

• A well-established global reinsurance business

• A strong distribution network in 150 countries

Buffett saw an opportunity to deploy this massive float into high-return investments, compounding Berkshire’s capital at a much faster rate​.

2) Global Expansion into Reinsurance

Unlike GEICO, which specialized in direct-to-consumer auto insurance, General Re was a major player in reinsurance—a sector where Buffett saw long-term growth potential.

• Reinsurance allows insurance companies to offload risk, making it a critical part of the financial system.

• General Re’s acquisition gave Berkshire instant access to international markets, strengthening its presence in Europe, Asia, and Latin America.

Buffett later said:

"For many decades, General Re’s name has stood for quality, integrity, and professionalism in reinsurance."

3) Permanent Capital for Investments

Buffett had always preferred permanent sources of capital—money that doesn’t require frequent fundraising.

Unlike mutual funds or hedge funds, which face investor withdrawals, insurance float is long-term capital. With General Re’s float, Buffett could invest billions in stocks without worrying about redemptions, giving him greater control over Berkshire’s investment strategy​.

General Re’s Business Model and Operations Before Acquisition

General Re was one of the largest reinsurance companies in the world, operating in four key segments:

1) North American Property & Casualty Reinsurance

• 48% of total revenue (~$3.97 billion)

• Included treaty reinsurance (pre-arranged coverage for insurers) and facultative reinsurance (individual risk underwriting).

• Primarily covered corporate clients, commercial insurers, and specialty markets.

2) International Property & Casualty Reinsurance

• 33% of total revenue (~$2.71 billion)

• Business was heavily tied to Cologne Re, which General Re had acquired in 1994.

• Major exposure to European and Asian insurance markets.

3) Life & Health Reinsurance

• 15% of total revenue (~$1.28 billion)

• Covered group life, individual life, and health insurance risks.

• 47% of business was in North America, 38% in Europe, and 15% in other regions.

4) Financial Services & Derivatives

• 4% of total revenue (~$301 million)

• Provided derivatives, structured finance, and risk management solutions for corporations.

The Challenges Buffett Faced After the Acquisition

Despite General Re’s strong reputation, Buffett soon discovered serious problems within the company:

1) Under-Reserving for Claims

One of the biggest risks in reinsurance is accurately predicting future claims costs. General Re had been too aggressive in pricing policies, leading to massive under-reserving.

• Many of General Re’s long-term policies had unexpectedly high claims, requiring billions in additional reserves.

• Buffett later admitted that General Re had underestimated risk, leading to losses in the early years post-acquisition.

2) High Operating Expenses

Unlike GEICO, which had a low-cost, direct-to-consumer model, General Re operated like a traditional insurer with high employee costs and inefficient operations.

• The company’s expense ratio had been rising, making it less competitive.

• Buffett had to implement cost-cutting measures to improve profitability.

3) Regulatory Scrutiny and Legal Issues

In the early 2000s, General Re was involved in regulatory investigations, including a reinsurance transaction with AIG that later led to fraud charges.

Although Buffett himself was never implicated, the scandal hurt General Re’s reputation and led to management changes.

4) Integration Struggles

• General Re had a very different corporate culture compared to Berkshire Hathaway’s decentralized model.

• Buffett took a hands-off approach, but integrating General Re took longer than expected.

Despite these issues, Buffett remained committed to turning General Re around, believing that long-term float generation would offset short-term problems​.

The Results: Did the Acquisition Pay Off?

By the mid-2000s, General Re had finally stabilized, and Buffett had successfully:

• Reduced underwriting losses

• Strengthened risk assessment

• Increased investment returns on General Re’s float

While the early years were rocky, General Re ultimately became a valuable part of Berkshire Hathaway’s insurance empire.

Buffett later stated:

Lessons from Buffett’s General Re Investment

1) Even Great Investors Make Mistakes

Buffett overpaid for General Re at a high price-to-earnings multiple (23.5x) and price-to-book ratio (2.7x).

He later admitted that he underestimated underwriting risks, leading to several years of losses.

2) Insurance Float is the Ultimate Investment Advantage

Despite early struggles, General Re’s float provided billions in long-term capital, reinforcing Buffett’s insurance-driven investment strategy.

3) Culture Matters in Mergers

General Re’s corporate structure didn’t align with Berkshire’s, making integration difficult. Buffett had to implement major cultural changes to improve profitability.

Conclusion: A Tough But Ultimately Successful Acquisition

Buffett’s $22 billion General Re acquisition was one of his most challenging deals. While it faced early setbacks, it ultimately provided Berkshire with a major float expansion and global reinsurance reach.

Key Takeaway: Even when Buffett overpays or encounters difficulties, his long-term approach allows him to turn even problematic acquisitions into successful investments.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.