After a week of rumors, Joseph Brandon finally stepped down as CEO of General Re, a Berkshire Hathaway subsidiary and one of the country's largest reinsurance companies.
Brandon's resignation is big news because he was frequently praised in Buffett's annual letters to shareholders. Berkshire followers considered Brandon a leading candidate to replace the great man when he eventually retires. But Brandon is now the second General Re CEO to step down under a cloud. Ron Ferguson was the first.
Warren Buffett does not like to use stock to consummate acquisitions. He made an exception, however, when he bought General Re on Berkshire's behalf in 1998 for $22 billion using a combination of cash and stock. Things soured almost from the start.
When writing about General Re in his 1999 letter to shareholders, Buffett said, "we had a huge--and, I believe aberrational--underwriting loss." He said General Re was underpricing policies, yet he also praised CEO Ferguson. However, just a couple of years later, Ferguson was out and Brandon was in.
It turns out General Re was also plagued with other problems. It had accounting irregularities that resulted in $800 million of costs being charged against 2001 earnings. It had derivatives-related losses that amounted to about $400 million. In fact, these losses prompted Buffett to make his now famous statement calling derivatives "financial weapons of mass destruction."
Just two months ago, Ferguson and three other General Re executives were convicted of helping American International Group, formerly run by Maurice Greenberg, deceive investors by manipulating earnings with fraudulent reinsurance contracts. Although Brandon was not convicted of any crime, prosecutors considered him a co-conspirator and Buffett came under intense pressure to let him go. Today, he relented to that pressure.
Losing Brandon can not be easy for Buffett. Each year, Buffett heaps praise on several of his managers in his annual letter to shareholders. Brandon's name frequently showed up in these letters. Now that Brandon is gone, Ajit Jain is the leading candidate to become Berkshire's next CEO. If interested, you can read more about Berkshire's investment in General Re in my forthcoming book, Even Buffett Isn't Perfect.
