Buffett Sees Insurance Abuse Halt
By Jonathan Stempel
May 1, 2005
OMAHA, Neb. (Reuters) - Warren Buffett on Sunday said recent regulatory probes into the insurance industry have all but halted abuse, and also that he has tempered some of his enthusiasm for euro-denominated investments.
Buffett has in recent months received unwanted publicity as investigators probe various insurance practices, including some involving General Re Corp, a unit of his company, Berkshire Hathaway Inc.
But speaking at press conference a day after answering five hours of questions before thousands of shareholders at Berkshire's annual meeting, he said the industry is aggressively ridding itself of abuse.
"I really think it's gone," Buffett said. "Managements, auditors, possible whistleblowers ... I think they are so sensitized." Buffett added, though, that "there will always be outright crooks."
Charlie Munger, who is Berkshire's vice chairman and sat next to Buffett, added: "We had a couple of big public hangings, and that really changed behavior."
Several top industry executives lost their jobs in recent months, including Maurice "Hank" Greenberg, who ran insurer American International Group Inc., and his son Jeffrey, who ran insurance broker Marsh & McLennan Cos.
Regulators have subpoenaed several companies, including General Re, on whether "non-traditional" or "loss mitigation" products might function as loans to help companies smooth earnings, or camouflage earnings weakness or losses.
They interviewed Buffett on April 11 about a questionable transaction involving General Re that helped make AIG's results look better. A day later, Hank Greenberg did not answer questions from regulators examining AIG's accounting, citing his constitutional right against self-incrimination.
"The question is whether there were transactions that didn't transfer enough risk to qualify as reinsurance," said Keith Trauner, who invests 20 percent of Fairholme Capital Management's $1.5 billion of assets in Berkshire shares. "There is a vast gulf between companies that bought policies and treated them incorrectly, and companies that sold policies and treated them correctly on their own balance sheets."
Berkshire has said Buffett was not briefed on the AIG transaction's structure or any improper purpose.
Separately, Buffett said he still likes euro-denominated investments, but less than he did when the U.S. dollar was worth more.
At the annual meeting, Buffett said Berkshire in the first quarter roughly maintained its year-end $21 billion-plus stake in foreign currency contracts. But he said Berkshire lost about $310 million from this bet as the dollar rose, after gaining $1.63 billion in the prior quarter.
"I like the fact of euro-denominated investments, although at $1.30 or so I don't feel the degree of preference I did when the euro was much cheaper," Buffett said on Sunday, referring approximately to the cost of buying one euro. The euro is trading at just under $1.29.
Separately, the 74-year-old Buffett declined to elaborate on a New York Times article suggesting three possible successors at Berkshire: Joseph Brandon, who runs General Re; Ajit Jain, who runs other Berkshire insurance units, and David Sokol, who runs Berkshire unit MidAmerican Energy Holdings Co.
"We will look at people that have demonstrated great success at not only their own specific businesses, but grasping the realities of various businesses, and who have demonstrated great commitment to the kind of culture that Berkshire has," Buffett said. "We do have three that are reasonably young in that category. I hope that five years or more from now we'll have more than three."
Earlier, Buffett said Brandon "has done a superb job" in reducing the risk appetite of General Re, which he took over in 2001. Separately, referring to Jain, Buffett said: "There's nobody at Berkshire Hathaway that I would have more confidence in than Ajit."