Warren Buffett and Maurice Greenberg Under Investigation for Use of Finite Reinsurance

Strategic Insights -

Warren Buffett, the chairman and chief executive of Berkshire Hathaway, and Maurice R. Greenberg, the former chief executive of American International Group (A.I.G.), are being investigated for their use of finite reinsurance in contracts between the two companies. The investigation, led by New York Attorney General Eliot Spitzer, is examining a transaction in 2000 between General Re, a Berkshire Hathaway unit, and A.I.G. that artificially increased A.I.G.'s premium reserves, ultimately helping its stock price and its ability to acquire another company.

Key Takeaways:

  • Warren Buffett, the chairman and chief executive of Berkshire Hathaway, is cooperating with the investigation and is a witness, not a target, according to a person briefed on the actions.
  • The investigation is focusing on a transaction in 2000 between General Re, a Berkshire Hathaway unit, and A.I.G. that artificially increased A.I.G.'s premium reserves.
  • The deal was arranged by Ronald E. Ferguson, the chief executive of General Re at the time, and involved a product known as finite reinsurance, which can be used to make a company appear financially stronger than it really is.
  • Investigators and regulators say that General Re, a unit of Berkshire Hathaway, is believed to be the source of many of the finite reinsurance transactions.
  • Berkshire Hathaway has stated that operating decisions for the various business units, including General Re, are made by the executives running those units, not Warren Buffett.
  • Warren Buffett is scheduled to sit for an interview with investigators from the New York Attorney General's office, the Securities and Exchange Commission, and the Justice Department on April 11.
  • Maurice Greenberg, the former chief executive of A.I.G., is also scheduled to sit for an interview with the same group of law enforcement officials and regulators on April 10.
  • Regulators are trying to determine the extent of Warren Buffett's knowledge of the deals, which remains unclear.
  • Investigators are also looking into the involvement of other Berkshire Hathaway executives, including Ajit Jain and Joseph P. Brandon, who supervised Berkshire insurance units that sold products at the core of international regulatory scrutiny.
  • A unit of Berkshire Hathaway, National Indemnity, sold finite reinsurance to a struggling Australian concern, F.A.I., in 1998, which regulators say masked F.A.I.'s financial problems and contributed to the company's collapse.

Statistics:

  • Class A shares of Berkshire Hathaway rose $200, or 0.2 percent, to $87,000 in trading yesterday on the New York Stock Exchange.
  • Shares of A.I.G. rose 2.1 percent, or $1.18, to $58.20.
  • General Re sold finite reinsurance to H.I.H. Insurance, a large Australian concern, before it collapsed in 2002.
  • The transaction was completed long before Berkshire Hathaway acquired General Re in December 1998.
  • Australian regulators contend that finite reinsurance masked F.A.I.'s financial problems, contributing to the company's collapse.

Sources:

  • "Warren E. Buffett is said to be cooperating with investigators." (Photo by Anthony P. Bolante/Reuters)
  • New York Times
  • The Wall Street Journal
  • The New York Attorney General's office
  • The Securities and Exchange Commission
  • The Justice Department