What unexpected problems did the acquisition of General Re bring to Warren Buffett?

Unexpected Troubles Brought to Buffett by the Acquisition of General Re

Warren Buffett acquired General Re for $22 billion in 1998, hoping to strengthen Berkshire Hathaway’s reinsurance business. However, this merger brought multiple unforeseen challenges across financial, operational, regulatory, and reputational dimensions. Key issues include:

1. Massive Underwriting Losses and Financial Burden

• Post-acquisition, General Re exposed severe underwriting issues, including mispricing and risk assessment failures, leading to years of substantial losses.
• Particularly after the September 11 terrorist attacks in 2001, General Re faced billions in claims, intensifying financial strain.
• Buffett acknowledged in his annual letters to shareholders that the acquisition caused unexpectedly large losses for Berkshire in 2001–2002.

2. Risks and Losses from Derivatives Business

• General Re’s derivatives unit (Gen Re Securities) engaged in complex financial derivatives trading, with undisclosed risks prior to the acquisition.
• The unit ultimately incurred approximately $400 million in losses, forcing Buffett to wind down operations to prevent further volatility and potential disasters.

3. Regulatory Scrutiny and Legal Disputes

• General Re became embroiled in a transaction scandal with AIG, where executives were accused of aiding AIG in manipulating financial statements through sham reinsurance deals.
• This triggered investigations by the SEC and the Department of Justice, resulting in hefty fines for General Re and criminal charges against several executives.
• Though Buffett was not directly implicated, Berkshire as the parent company faced reputational fallout and consumed significant management resources.

4. Reputational Damage and Internal Management Challenges

• Buffett regarded this acquisition as a major career misstep, tarnishing his image as a "value investing guru" and prompting repeated self-criticism in shareholder letters.
• Cultural clashes emerged as General Re’s corporate culture conflicted with Berkshire’s conservative ethos, causing integration difficulties and talent attrition.
• Overall, the deal dragged down Berkshire’s stock performance and led Buffett to reflect on inadequate due diligence in M&A decisions.

Though these issues were gradually resolved in subsequent years (e.g., through restructuring and divesting non-core assets), they underscored the high risks in reinsurance and uncertainties in mergers. Buffett emphasized in his letters that this experience reinforced his focus on risk control and long-term value.