Insurance inquiries reach Buffett's firm
By Joseph B. Treaster
The New York Times
March 17, 2005
But experts see only limited damage
He embodies the Middle American archetype of the plain-speaking, straight-shooting businessman. In the age of imperious chief executives, he is cheered by investors at annual gatherings that include barbecue and baseball.
After years of corporate scandals, Warren Buffett, 74, stands as a paragon of management. But an accelerating investigation into certain insurance practices has ensnared one of Buffett's main businesses, raising the possibility that the most gleaming reputation in corporate America may be tarnished.
Insurance is at the core of Buffett's company, Berkshire Hathaway.
The U.S. Securities and Exchange Commission and the New York State attorney general have been investigating a deal between a Berkshire unit, General Re, and American International Group, the world's top insurer, that may have artificially bolstered AIG's finances.
That inquiry led to the departure on Monday of the man who built and ruled AIG for nearly four decades, Maurice Greenberg. Investigators are also looking into other so-called finite insurance deals by Buffett's companies.
"Some of his transactions may come back to haunt him," said Andrew Barile, an insurance consultant. "He did a lot of the kinds of deals they're looking at."
At Berkshire Hathaway's headquarters in Omaha, Nebraska, a spokeswoman, Debbie Bosanek, said that Buffett would not comment.
In defense of Buffett, insurance experts say, his management of Berkshire is very different from Greenberg's time at AIG. While Greenberg had his hands on practically every aspect of AIG, Buffett, known more for his investing acumen than his management prowess, prefers to delegate.
"If there is damage, it might be limited to the insurance units, without having a major impact on the Berkshire dynasty," said Ric Marshall, chief analyst at the Corporate Library in Portland, Maine. "This won't have a personal impact on Buffett in the way it did with Hank Greenberg. It's a matter of personal style and involvement."
Buffett has not been named in any of the insurance investigations.
Still, Berkshire's General Re is also under investigation by the U.S. Justice Department for its role in providing policies to a failed liability insurance company that operated in Virginia, Tennessee and some other states. And it has been named as a defendant in lawsuits by two insurance regulators.
Last May, the Australian unit of General Re agreed to pay a $27.2 million settlement with the Australian Securities and Investments Commission over coverage to two Australian insurers that eventually collapsed. The transaction took place before Berkshire bought General Re in mid-1998. But Berkshire must still deal with Australian officials on the consequences of the deals.
In his annual report to investors this month, Buffett said the liquidator of the two Australian companies planned to file claims against Berkshire, maintaining that General Re contributed to the downfall of the companies by helping them with improper accounting.
On Tuesday, Berkshire disclosed that it had received a notice to show cause from the Australian Prudential Regulatory Authority. Berkshire said General Re had until March 29 to show why it should not be investigated.
Berkshire says it is cooperating with all of the investigations.
There are other differences between Buffett and Greenberg. Like many chief executives, Greenberg was keenly aware of his company's quarterly performance. Buffett, on the other hand, has always managed for the long run and discouraged trading of Berkshire shares.
One of his methods to accomplish this was to refuse to split the stock into shares of manageable trading size.
Berkshire Hathaway's stock was trading late Wednesday at $87,800.10, down $2,099.90, or 2.3 percent.
Because Berkshire was not trying to show consistent quarterly gains, the insurance experts said, it is doubtful that Berkshire would have done the kinds of deals that Greenberg is said to have arranged to strengthen his balance sheet.
Nonetheless, Buffett is enthusiastic about insurance, and he has overseen some of the major deals done by Berkshire units. And, along with other major reinsurers, General Re and other Berkshire units have widely offered the kind of insurance that has been the focus of investigators: financial reinsurance, or finite insurance, as it is often called.
"It is possible that Gen Re, through the sale of some of these finite insurance products, could have some financial liability," said Kevin Lampo, an analyst with Edward Jones.
Finite insurance allows companies, often insurers, to spread their risk of loss on an asset or business over time and to distribute risk among other insurers willing to take it on in exchange for premiums. It becomes questionable when it appears not to be insurance - when no risk has been transferred - but essentially a loan.
Much finite insurance does involve a transfer of real risk. Even so, one insurance executive said, it is probable that the investigators "will find a lot of transactions they don't like very well," because the risk factor may have been minimal or nonexistent.
Ira Zuckerman, an analyst with Stanford Financial Group in Boca Raton, Florida, said it seemed highly unlikely that Buffett's reputation would suffer any major damage as a result of the insurance investigations.
"If in fact he was involved in any of this, and if the deals were wrong, then he has some responsibility," Zuckerman said. But even then, he said, "I would think it's a smudge, but it's not a smear."