It appears from the comments on the Q3 report (page 13, last para) that General Re will continue to do 'poorly.' The report says that "additioanl premium rate increases and more favorable coverage terms are needed." But, there is no indication that it would happen. Significant rate increases have already taken place in the recent past and my guess is there may not be any increase in the rates in the near future (just from casual reading of news items). Thus, if the GRN is not doing well with the current rates, how can it do well in the future? I am lost - Is GRN a headache? Maybe, some of you discussed this and have the answer. I did not find any. I would greatly appreciate your inputs.
Even with the additional reserves Gen Re took this qaurter, the addtion to reservers this eyar is not that high compared to the premiums. In all likelyhood, Gen Re may ever be as profitable as Geico, from an insurance underwriting standpoint. Gen Re never was before BRK took them over. Gen Re, because of the nature of their business, will also have more volatile underwriting results.
"if the GRN is not doing well with the current rates, how can it do well in the future?"
Gen Re's recent additions to reserves, according to the report, relates to policies previously written, some of them previous to being acquired by BRK. Because of the longer tail nature of their business, we won't know if current pricing is adequate for a while. Sounds like Mr. Buffett doesn't think the pricing is adequate. Either that or the coverage isn't restrictive enough. Maybe even a combination of the two.
~~~Gen Re's recent additions to reserves, according to the report, relates to policies previously written, some of them previous to being acquired by BRK. Because of the longer tail nature of their business, we won't know if current pricing is adequate for a while. Sounds like Mr. Buffett doesn't think the pricing is adequate. Either that or the coverage isn't restrictive enough. Maybe even a combination of the two.~~~
This looked like the only real blemish in an otherwise fine quarter, and it makes me wonder. WEB did NOT take an asset impairment charge against the sizeable goodwill on the books (mostly from GenRe) when they reviewed it last quarter (must do it once a year). But when you look at the seemingly neverending losses/under-reserving that continue, do you suppose that the reserve would be adequate for ANY other reinsurer other then WEB, so he's taking their reserves to the same (possibly over-reserved, for tax deferment) level as our other insurance companies? If not, I would have thought the assets would be impaired somewhat.
is this loss not basically a reserve against past policies. i suspect the future increases are to get its cost of funds where web would want it in this low interest rate environment- positive.
General Re could make us all rich and never earn a penny. Take free or cheap float and invest in non-income producing properties. Increase float each year and leverage "investments."
As the "investments" appreciate we get rich. And we don't report any income.
Have you ever tried to see how Wesco could possibly have $300 per share of intrinsic value? They've never earned much have they Web?
I have done this only to understand the business. I am not suggesting I fully understand float, its benefits and costs, etc.
GenRe float at the end of 2001 was $19.3 B. (as per the Letter).
What is the cost of that float? This is a difficult question because we do not usually use present values (which is important for this purpose). But, let us do it the way Buffett does it in his letters:
Nine months in 2002: (666)
Total for three years and 9 months: (4754)
Loss per year: $1267 per year
Average float: Around $18 billion (it is a generous number, actually it is smaller).
Cost of float: 1267/18000 = 0.07 or 7 percent.
Of course, it includes September 11 but that has been averaged over 3.75 years and therefore, it seems reasonable to me.
If we take only the last nine months, the cost of GenRe float is only 666/19,000 = 3.5 % (not that small). Note that there has been no serious (large) loss in the last nine months as mentioned in the quartely report. On the other hand, some adjustements were made from prior years. There are always adjustemetns and thus, I like numbers over a number of years rather than quarterly numbers.
Overall, the cost of float for GenRe is pretty high but not horrible. If it continues, it is not going to kill BRK but it adds almost no value. If the float earns 7% (and the cost is 7%0, value added is close to zero.
On the other hand, if the cost of float become 3.5%, GenRe may be valued at about half the value of float (i.e., around $10 B) because it is in Buffett's hands. It is not GenRe's problem alone. All of you probably saw the horrible performance of some other large Re's around the world this year. We hope that things will improve because as Buffett pointed out in 2001 annual report, "GenRe's management has taken several steps - -"
These comments are primarily for thinking about the numbers and not to crticize anyone. I hope you understand that.
"...General Re has long-term relationships with many accounts. And the question of what you do when your competitor offers a price that's a little too low with somebody you've been doing business with for 50 years is a very tough decision to make. So sometimes they probably do some business that might be labelled as a necessary evil"