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Berkshire Hathaway May Buy GE Unit

Employers Reinsurance acquisition would make Warren Buffett's firm world's biggest reinsurer by premium income.

November 11, 2002|From Bloomberg News

OMAHA — Warren Buffett may buy General Electric Co.'s Employers Reinsurance Corp., making the investor's Berkshire Hathaway Inc. the world's biggest reinsurer by premium income, people familiar with the situation said Sunday.

Price is the major obstacle, they said. Buffett has offered less than the $8 billion GE wants, questioning whether the unit has sufficient loss reserves, they said. Berkshire increased loss reserves at its principal reinsurance unit, General Reinsurance, by $447 million in the first nine months.

The acquisition would bolster Berkshire's premium income at a time when bigger-than-expected claims and investment losses have eroded earnings of Munich Re and Swiss Re, the No. 1 and No. 2 companies in the business of buying portions of policies written by other insurers. A sale would free Fairfield, Conn.-based GE of a unit it expects to lose money this year as Chief Executive Jeffrey Immelt sheds slow-growing operations.

"Buffett must think he is getting a lot of value on the deal," said Matthew Sauer, a money manager at Oak Value Capital Management, which has about $1.5 billion of assets, including Berkshire shares.

David Frail, a GE spokesman, declined to comment. Buffett, who didn't return a call for comment, said in his annual letter to investors in May that he was looking for acquisitions in the range of $5 billion to $20 billion.

"We need elephants to make significant gains now, and they are hard to find," he wrote.

On Friday, GE shares closed at $25.10, down $1.01, while Berkshire Hathaway's Class A shares rose $1,100 to close at $74,700. Both trade on the New York Stock Exchange.

Omaha-based Berkshire gets about a third of its revenue from reinsurance and more than half from insurance and reinsurance combined.

Reinsurers have raised prices by about 60% across all lines of business since September 2001, as they pay claims from the Sept. 11 terrorist attacks, as well as increased claims related to asbestos lawsuits.

Employers Re, which GE acquired in 1984, lost $156 million in the third quarter. GE Chief Financial Officer Keith Sherin said in September the reinsurer would lose $350 million to $450 million this year before breaking even next year.

GE increased Employers Re's reserves by $900 million before taxes through the third quarter and didn't renew about 40% of the policies the unit wrote in 2000, Sherin said.

The reinsurer, with assets of about $37 billion, employs about 3,700 of GE's 310,000 workers, according to the company's Web site. The unit's book value is about $7 billion, said Michael Paisan, an analyst at Legg Mason Wood Walker Inc. in New York.

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