Dublin linked with probe of Warren Buffett insurance unit

By Finfacts Team
Last Updated April 11, 2005

Insurance investigations set in train by New York Attorney General Eliot Spitzer in the US and the Australian Securities and Investments Commission (ASIC), are targeting suspect transactions, which took place at Dublin's International Financial Services Centre (IFSC).

The New York Times reports that Berkshire Hathaway insurance affiliates run by legendary investor Warren Buffett's most trusted deputies are involved in what investigators describe as possible financial manipulation at insurance giants like the American International Group (AIG) and the Zurich Financial Services Group.

Investigators are examining Berkshire transactions that they say helped lead to the collapse four years ago of an insurance company involved in the biggest financial scandal in Australian history.

According to the New York Times, investigators say they have traced many suspect transactions to a Berkshire subsidiary in Dublin, where at least two Berkshire executives who were recently banned from the Australian insurance market for engaging in abusive practices, continue to work for the company.

Berkshire Hathaway's insurance company General Re operates a subsidiary named Cologne Reinsurance Company, at Dublin's IFSC offshore centre.

Dublin's offshore financial services centre was established in 1987 and in the words of a 2004 report for the Irish Government, has been exceptionally successful in attracting international financial services companies to locate there. The list of international companies with operations in Dublin is a "who’s who" of the international financial services sector – Citigroup, JP Morgan Chase, ABN AMRO, ING Group, MBNA, Merrill Lynch, State Street, Unicredito and AIG to name but a few.

General Re is under investigation by the US Justice Department for its role in providing policies to a failed liability insurance company that operated in Virginia, Tennessee and other Southern states.

In May 2004, the Australian unit of General Re agreed to pay a $27.2 million settlement with the Australian Securities and Investments Commission over coverage provided to two Australian insurers, which eventually collapsed.

The Australian transaction took place before Berkshire bought General Re in mid-1998. However, Berkshire must still deal with Australian officials on the consequences of the transactions.

In his annual report to investors in early March, Warren 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 cooking the books.

The Australian Securities and Investments Commission (ASIC), said that General Re Australia Ltd (GRA) paid $27.2 million to the liquidator of FAI General Insurance Company Limited as part of an enforceable undertaking provided to ASIC. The enforceable undertaking follows ASIC's investigation into reinsurance arrangements entered into by FAI with GCRA in 1998. It is alleged that the true substance of those arrangements was concealed from FAI's auditors by senior FAI executives.

A claim by the Virginia state insurance commissioner against General Re is that General Re participated in a scam where a company lends money to another but calls it "insurance" instead so the borrower doesn't have to put debt on its balance sheet.

Eliot Spitzer's probe of AIG, which cost CEO Maurice Greenberg his job centres on transactions including a 2001 one with General Re, which it is alledged were used by AIG to fraudulently enhance its earnings.

On Tuesday Berkshire Hathaway issued the following statement:

Recent press accounts of the ongoing investigation of certain reinsurance transactions have inaccurately reported the following: 1. It was reported that National Indemnity, a subsidiary of Berkshire Hathaway headed by Ajit Jain, used a "side letter" to document a transaction with a to-be-acquired subsidiary of Australian insurer H.I.H. No such side letter existed or was used. Gen Re, a Berkshire Hathaway subsidiary since December 1998, did use a side letter in its transaction with H.I.H., a transaction entered into well before Gen Re was acquired by Berkshire Hathaway.

It was reported that "Mr. Buffett typically speaks with the heads of Berkshire’s units late each afternoon." With the exception of Mr. Jain, Mr. Buffett speaks infrequently with the Berkshire Hathaway business unit managers and leaves operating decisions for the business units to the individual managers, a policy publicly reported regularly since 1984. 3. It was reported that Mr. Buffett was briefed on the "nature" and "structure" of the 2000-2001 reserve transactions between Gen Re and AIG. To the contrary, Mr. Buffett was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions.

Berkshire Hathaway does not expect any restatement of its financial reports. Berkshire Hathaway and Gen Re have been actively cooperating with the ongoing reinsurance investigation. In connection therewith, a number of Berkshire/Gen Re representatives have voluntarily given interviews to the investigating authorities, and Mr. Buffett will shortly do so as well. Berkshire Hathaway and its subsidiaries engage in a number of diverse business activities among which the most important is the property and casualty insurance business conducted on both a direct and reinsurance basis. Common stock of the Company is listed on the New York Stock Exchange, trading symbols BRK.A and BRK.B.

On Wednesday, AIG issued a statement:

AIG announced that it is deferring the filing of its 2004 accounts with the 2004 as it is reviewing reinsurance transactions with General Re.

The initial investigations related principally to an assumed reinsurance transaction involving two tranches of $250 million each which took place in December 2000 and March 2001 between an AIG subsidiary and a subsidiary of General Re Corporation ("Gen Re"). In connection with each tranche, each of consolidated net premiums written and consolidated net loss reserves increased by $250 million in each of the fourth quarter of 2000 and the first quarter of 2001. The first tranche of the transaction was commuted in November 2004, which reduced premiums and reserves for losses and loss expenses by approximately $250 million in the fourth quarter 2004 previously reported unaudited financial information. The second tranche remains on AIG's books as previously recorded.

Based on its review to date, AIG has concluded that the Gen Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance. Therefore, AIG's financial statements will be adjusted to recharacterize such transactions as deposits rather than as consolidated net premiums. The recharacterization will have virtually no impact on AIG's financial condition as of December 31, 2004, but will reduce the reserve for losses and loss expenses by $250 million and increase other liabilities by $245 million.

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