Finite Reinsurance Probes Appear Infinite
The Insurance Journal
May 9, 2005
Investigators' interest in finite reinsurance transactions goes well beyond the five-year old agreement between American International Group and Berkshire Hathaway's General Re that has been targeted by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission since last year.
General Reinsurance, a subsidiary of Berkshire Hathaway Inc., is also being questioned in the affairs of Reciprocal of America, a former Virginia-based professional liability insurer whose collapse is considered one of the largest insurance fraud cases in that state's history. General Re received a subpoena in October 2003 from the U.S. Attorney for the Eastern District of Virginia, Richmond Division. General Re provided various reinsurance coverages to ROA from the late 1970s through 2002.
ROA, which insured doctors, hospitals and lawyers, failed in 2003 after rolling up unpaid liabilities of $450 million. Two former employees of the company pleaded guilty to using accounting tricks to hide the firm's financial problems from state regulators.
Last month, Florida began probing the dealings of 17 reinsurers that sell finite risk policies. Florida Insurance Commissioner Kevin McCarty issued investigative subpoenas to 17 companies: ACE Tempest Re, Acordia Re, AIG Reinsurance, Alea London Limited, Benfield Re, BIG Re, Chubb Atlantic Reinsurance Specialist Ltd., E&S Reinsurers Ltd., Guy Carpenter, Hannover Re Ltd., Hannover Ruckversicherungs-Atiengellschaft, Jardine Sayer, National Indemnity Company of the South (a subsidiary of Berkshire Hathaway), National Union Fire Insurance Company of Pittsburgh, Penna. (a subsidiary of AIG), Partner Reinsurance Company of the U.S., Swiss Reinsurance American Corporation and Transatlantic Reinsurance Company (another subsidiary of AIG).
Early this month, the SEC subpoenaed General Electric over finite-risk reinsurance contracts. GE said its GE Insurance Solutions unit has made "limited use" of the product to manage the risk of catastrophic event and said its auditors have conducted numerous reviews of these agreements during the past several years and the company is confident that they have been properly structured and disclosed.
Evan Greenberg, president and chief executive of ACE Ltd., said that his company's investigation into its finite products should be completed within a month and so far no accounting irregularities have been unearthed. Greenberg said contracts studied to date appear "generally structured in a way to provide for appropriate risk transfer and accounted for properly."
With all of the activity raising doubts about AIG and reinsurance products, Billionaire investor Warren Buffett, and his right hand man, Charlie Munger, expressed confidence in AIG as they addressed Berkshire Hathaway Inc. shareholders recently.
Asked about the status of AIG, Buffett said he would read with interest any more disclosure when AIG files restated earnings. That filing is now expected by the end of May.
Munger, Berkshire's vice chairman, went further, saying, "Whatever comes along, people are going to find that a lot of what was done over the years was right at AIG."
Buffett said former AIG chief executive Maurice Greenberg had built a great company. "He became the most important figure in the property casualty business," Buffett said.
Buffett said the key is whether someone knowingly participated in any accounting fraud. His companies provide reinsurance to hundreds of other insurance companies and cannot always answer to what those firms do, Buffett said. "They could be doing anything with the accounting," Buffett said.