Australian Regulators Investigating Gen Re Contracts

April 15, 2005

The waters of the finite reinsurance ocean continue to roil, as the Australian Prudential Regulation Authority (APRA) announced that it has launched an investigation into “certain reinsurance practices” involving the Australian subsidiary of Berkshire Hathaway’s General Re.

The probe is the latest to put in question the nature of finite risk insurance contracts concluded by Gen Re, AIG and other companies. Berkshire’s CEO Warren Buffett recently discussed Gen Re’s dealings with AIG in a hearing held by investigators from the SEC and NY Attorney General Eliot Spitzer’s office (See IJ Website April 12).

Australia has more than just a general interest in the matter, as there’s some evidence that such contracts may have been concluded for the purpose of concealing the true financial condition of failed insurer HIH. Several principals were recently sentenced for their part in the company’s collapse (See following article).

In addition to examining the activities of General Reinsurance Australia, APRA and securities regulators are also looking into reinsurance contracts concluded between Germany’s Hannover Re and FAI, a company that HIH Bought in 1998. As it was collapsing HIH reportedly received A$80 million (U.S.$61.5 million) when Hannover “bought back” its liabilities under a major reinsurance contract.

Gen Re has indicated that it will cooperate with APRA’s investigation. Berkshire’s National Indemnity Co. has already turned over a $2 million premium payment to the Australian liquidator in charge of the HIH bankruptcy (See IJ Website March 31, 2005).

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