Berkshire Hathaway, General Re, and Franchise Risk

Abstract

This article illustrates how the modern value-investing framework can be employed to more effectively value insurance companies. By utilizing the case study of Berkshire Hathaway's 1998 purchase of General Reinsurance Corporation, this article demonstrates how to more effectively construct a valuation, and specifically how to better consider the unique and intangible aspects of insurance company valuation. At approximately $22 billion General Re was Berkshire Hathaway's largest acquisition, and given the losses sustained post-buyout, it was also the firm's most troubled. Berkshire Hathaway's experience here is no mark against the unparalleled expertise of its chairman, investor Warren Buffett, but rather illustrates the unpredictability and volatility of insurance company valuation.