2003: Why did GenRe buy CologneRe?

AUDIENCE MEMBER: Good morning, gentlemen. My name is Olaf Heine (PH) from Germany. And not surprisingly, I have a question concerning the German reinsurance market, fitting nicely in the context of the questions before.

When you acquired General Re, I believe you inherited, also, a substantial stake in Cologne Re. Now in your last letter to your shareholders, you hinted that a major reinsurance company might be in trouble, widely believed to be Gerling Re, just mentioned.

You also mentioned, about an hour ago, that Germany was kind of a drag insurance-wise — (laughs) — if you are — if I understand you correctly.

WARREN BUFFETT: I don’t — I mean, I don’t believe I — I didn’t mean to say that.

AUDIENCE MEMBER: OK, but it helps to formulate the question. (Laughter)

WARREN BUFFETT: OK, well, for the purpose of your question we’ll assume I said it — (laughter) — yeah. But I didn’t say it.

AUDIENCE MEMBER: So now Gen Re decided to exercise a call option on the remaining shares of Cologne Re, another German reinsurance company. And my question simply is, what motivated you to do so?

WARREN BUFFETT: Yeah, that’s a good question. And it was mis — it was sort of somewhat misreported in the press, what happened on that.

What really happened is that Gen Re — I don’t know whether it would be about six or seven years ago now — acquired a significant position in Cologne from the controlling shareholder, with a put and call arrangement for the remainder.

I don’t even know the history, exactly, of why they went for this two-step transaction, but basically it was a two-step purchase.

So that all along we have accounted for Cologne as if we were going to exercise the option. Because, in effect, if we didn’t exercise, they would exercise. And it was fait accompli that we would buy that stock right from the start.

So we made no affirmative — we made an affirmative decision six or seven years ago to buy a very significant percentage of Cologne. We now have — will have about 89 percent when the option’s exercised.

But there’s nothing new in the fact that we are now doing it. The put and call arrangement, as I remember, became effective, essentially, this year.

So this was the year that something had to be done, and was planned to be done all along. And it reflected no new judgment, no new decision about Cologne in the year 2003.

It reflects a decision that was made in 1996 or ’97, whenever the original purchase was made.

And Cologne is an integral part of General Re. I mean, we knew all along that we would own 89 percent of it, pursuant to this contract. And it — that’s always been in our thinking, from the moment we sat down with the Gen Re management to make a deal some years ago.

So the press has sort of implied that there’s something new in this transaction that’s occurring this year, and there really isn’t.