Joe Brandon's Triumphant Return to Berkshire Hathaway

The former Gen Re CEO departed Berkshire under a cloud in 2008, but now returns as a key facet of the Alleghany acquisition

Happy Thursday and welcome to our new subscribers!

Last week, Berkshire Hathaway completed its $11.6 billion purchase of Alleghany — marking the company’s largest acquisition since Warren Buffett splashed $32 billion on Precision Castparts in 2016.

Alleghany is a natural fit for Berkshire with a very familiar business model: profitable insurance underwriting, investing the resultant float in undervalued securities, and then purchasing select companies outright.

The New York-based insurer closely resembles how Buffett runs Berkshire. Albeit on a much smaller scale.

And, now, it has officially joined the mother ship.

But, in my opinion, most of the discussion surrounding this move has missed the biggest storyline.

Namely, that Alleghany CEO Joe Brandon, once considered a potential successor to Buffett before departing the company under something of a cloud in 2008, is back.

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From just about the first moment that Berkshire Hathaway acquired General Re back in 1998, the reinsurance giant proved to be an unruly problem child for Warren Buffett and co.

A toxic brew of lax underwriting discipline and an inscrutable derivatives book put this transaction at immediate risk of failure.

A very, very expensive failure.

So, when Joe Brandon took over Gen Re in 2001 and started to set things right at the reinsurer, he scored major points with the Berkshire higher-ups.

And, by the following year, the Buffett-Brandon love-fest was in full swing.

In 2002, Buffett compared the new CEO to Jack Welch of General Electric:

Last fall, [Charlie] Munger and I read Jack Welch’s terrific book Jack, Straight from the Gut. In discussing it, we agreed that Joe has many of Jack’s characteristics: He is smart, energetic, hands-on, and expects much of both himself and his organization.

Then, a few months later, Buffett again spotlighted Brandon’s accomplishments — by recounting a humorous correspondence that he shared with the Gen Re chief’s mother.

Delores is known as “Dutchie” — but we call her “Saint Dutchie” at Berkshire headquarters because she gave birth some years ago to Joe Brandon, and Joe has been doing a fabulous job for us at General Re.

I wrote Dutchie a letter and I said, you know, it’s terrific what you’ve done for us, but I was a little like the farmer that went into the henhouse and pulled out an ostrich egg and said to the hens, “I don’t like to complain, but this is just a sample of what the competition’s doing.”

Well, I berated her a bit for not having twins, because if she just had a twin for Joe, we’d own the world.

She wrote me back and said she really had done her best. She’d had seven children — five of whom are in the insurance business — and she has nineteen grandchildren.

We have people out on the road trying to sign up these grandchildren now. (Laughs)

Buffett was still singing the same tune in 2005:

At General Re, Joe Brandon has restored a long-admired culture of underwriting discipline that, for a time, had lost its way.

Such consistently effusive praise did not go unnoticed, leading many careful observers to rank Brandon among the front-runners to one day succeed Buffett atop the Berkshire throne.

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Alas, such happy speculation did not last long.

Just a few short months later, Joe Brandon’s entire world got turned upside down when the Securities and Exchange Commission came calling.

The SEC had flagged an allegedly fraudulent transaction between Gen Re and American International Group in 2000 that served to artificially inflate AIG’s earnings and stock price. Owing to his senior position (CFO) at the time of the disputed deal, Brandon found himself right in the SEC’s crosshairs.

Interestingly, neither Buffett nor Munger seemed the least bit fazed by these allegations. Especially after Brandon denied all wrongdoing.

Both men continued to heap praise on the embattled Gen Re CEO as a maelstrom of controversy and innuendo swirled around him.

In 2008, Buffett wrote:

Thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the company has been restored. Joe and Tad have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J.P. Morgan. They have restored discipline to underwriting, reserving, and the selection of clients.

All the kind words in the world, though, don’t mean much in the face of overzealous federal prosecutors. The SEC might not have had enough (or any?) evidence to bring against Brandon in a court of law, but it successfully strong-armed him into resigning from Gen Re (and Berkshire) on April 14, 2008.

And, in a surprising twist, most of the financial media leapt to Brandon’s defense.

Perhaps his decision to cooperate with the government investigation without asking for immunity — and still losing his job — had something to do with that.

Alex Crippen of CNBC spat fire at the federal government’s tactics to force Brandon out of Gen Re:

It’s controversial for the government to reach into the C-Suite and dictate who does, and doesn’t, run a company, without making any formal accusations, much less proving them.

My opinion: the government has no business using the threat of legal action to tell Warren Buffett, of all people, that one of his top executives doesn’t have enough integrity for the job and should be fired.

Prove it! See you in court!

The Wall Street Journal felt much the same way:

Eliot Spitzer is no longer on the prosecuting side of the criminal justice system. But his brand of extrajudicial punishment is alive and well among U.S. Attorneys. Take the case of former Gen Re CEO Joseph Brandon, who was forced to resign on Monday although he has not been charged with any crime and was, by all accounts, a superb manager.

Insurance Insider noted that, “Brandon was yet another conspicuous victim of the aggressive prosecutorial posturing that provided the former New York Attorney General Eliot Spitzer with so much publicity and success.”

And, later, the WSJ acidly observed: “We have come to a strange pass in this country when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.”

Lawrence Cunningham, one of my favorite Berkshire-centric authors, wrote The AIG Story (with former AIG chairman Hank Greenberg) which — he says — explains why the “allegations were without merit and the related investigations flawed”.

That may or may not qualify as impartial commentary in your eyes, but the prevailing contemporary narrative surrounding Brandon’s ouster from Gen Re was that he got a raw deal.

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Even though Buffett couldn’t stop Brandon’s exit, he defiantly continued to praise the former Gen Re CEO at every opportunity.

In 2009, he wrote:

After Joe and Tad took charge, these problems were decisively and successfully addressed. Today, General Re has regained its luster. Last spring, Joe stepped down, and Tad became CEO. Charlie and I are grateful to Joe for righting the ship and are certain that, with Tad, General Re’s future is in the best of hands.

And, in 2011, his faith was vindicated when Brandon received a termination letter from the SEC notifying him that he would not be charged with any crime.

After three-plus years of whispers and doubts, Joe Brandon had finally won back his good name and could now resume his career in earnest. He joined Alleghany in 2012 as an executive vice president and steadily climbed the ladder all the way to CEO.

Through it all, Brandon and Buffett remained close — and, if not for Brandon’s recent ascent to the top spot at Alleghany, this acquisition would likely never have happened.

In February, the new Alleghany CEO sent Buffett a copy of his inaugural annual letter to shareholders — leading Buffett to suggest that the pair should meet up for dinner.

On March 7, at said dinner, Buffett made his offer ($848.02 per share) to purchase Alleghany outright. Brandon had only been in charge of the insurer for a little over two months before he was shaking hands on a deal to join Berkshire Hathaway.

Buffett trumpeted Brandon’s involvement in the transaction as a major plus. “Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for sixty years,” he said in a statement. “I am particularly delighted that I will once again work together with my longtime friend, Joe Brandon.”

I don’t think it’s any coincidence that, despite closely observing Alleghany for sixty years, Buffett didn’t make his move until Brandon was settled in the top spot.

For now, Brandon will continue to lead Alleghany as it becomes an independently-operated piece of the Berkshire machine.

What the future might hold, though, is anyone’s guess…

(Might we be looking at Ajit Jain’s successor?)

Okay, I’ll save that (baseless) speculation for another time. I’m just glad that Joe Brandon is back at Berkshire where he belongs.

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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.