Berkshire Hathaway Reports Finite Reinsurance Inquiries Continue

Warren Buffet’s Berkshire Hathaway continues to be dogged in the U.S. and abroad by investigations into its subsidiaries’ reinsurance deals.

In its second quarter report, Berkshire Hathaway discusses the various probes into finite reinsurance accounting practices by federal and state officials and reveals that it has fired the chief executive of one of its British insurance affiliates.

The probes by the Securities and Exchange Commission, the Department of Justice, New York Attorney General’s office, the Virginia insurance department and other entities center on finite reinsurance transactions between Berkshire Hathaway’s General Re, including deals with failed medical malpractice insurer Reciprocal of America and giant insurer American International Group. The officials are looking into whether finite reinsurance was used to bolster companies’ financial results rather than to transfer legitimate risk.

In its second quarter report, Berkshire indicated the investigation of the AIG transaction is expanding. Berkshire said it “believes that governmental authorities are reviewing the role of General Re and its subsidiaries, as well as that of their counterparties, in the AIG transaction and in assumed finite transactions, including whether General Re or its subsidiaries conspired with others to misstate counterparty financial statements or aided and abetted such misstatements by the counterparties. Governmental authorities are also inquiring about the accounting by certain of Berkshire’s insurance subsidiaries for assumed and ceded finite transactions…”

Also, the U.S. Attorney and the DOJ have continued to request additional information from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd. Richmond-based Reciprocal of America insured tens of thousands of doctors, lawyers and hospitals. Its collapse in late 2002 left policyholders scrambling to find insurance, and thousands may be liable for malpractice and other claims. Virginia and Tennessee regulators have accused Reciprocal and its business partner, General Re, of hiding the failed insurer’s deteriorating finances through fraudulent financial transactions. Their cases have been consolidated in a federal court in Tennessee, where Reciprocal’s three affiliates were based.

In connection with inquiries by Britain’s regulatory agency, the Financial Services Authority, into General Re, Berkshire Hathaway reported that it fired Milan Vukelic, head of The Farady Group who previously served as chief of international finite reinsurance at General Re.

Regharding the AIG transaction, two former General Re executives pleaded guilty in June to conspiring to file false financial reports that made AIG’s books appear better than they were.

AIG has restated prior accounting for the 2000-2001 reinsurance transaction with General Re and acknowledged that that it was done to accomplish a desired accounting result.

However, Maurice Greenberg, former AIG chairman and chief executive, who was ousted over the controversy, defended the reinsurance deals in a recent letter to the SEC.

Australian, Canadian and Irish officials are also inquiring about General Re’s finite reinsurance deals.