SEC wants data on policies issued by Berkshire

Regulator investigating if insurance hides losses

December 31, 2004|By BLOOMBERG NEWS

OMAHA, Neb. - Warren Buffett's Berkshire Hathaway Inc. said yesterday that the Securities and Exchange Commission requested information on insurance policies that may help companies smooth earnings.

Berkshire's reinsurance unit, General Re Corp., received the request and will cooperate, the company said. The regulator is scrutinizing whether the policies, often sold to other insurers as reinsurance, disguise losses and distort earnings.

The SEC's request signals that Berkshire may also get a subpoena from New York Attorney General Eliot Spitzer, who has broadened his investigation of the insurance industry beyond bid-rigging and kickbacks since starting the probe this year. Berkshire is at least the seventh company to get an income-smoothing inquiry from the SEC or Spitzer.

"It's possible that in General Re and other companies some people did disquieting things," said Thomas Russo, who helps manage $2.8 billion at Lancaster, Pa.-based Gardner Russo & Gardner. "In terms of core values, I would be shocked to find that the case at Berkshire."

Marc Hamburg, Berkshire's chief financial officer, didn't return a call for comment, and SEC spokesman John Nester declined to comment. Berkshire is the biggest U.S. reinsurer and also owns auto insurer Geico Corp.

Berkshire's Class A shares rose $400 to close at $89,200 yesterday on the New York Stock Exchange.

Berkshire "is probably the most active provider of these types of contracts," Fox-Pitt Kelton Inc. analysts Bill Yankus and Gary Ransom said in a November report about the policies, known as nontraditional or finite insurance. "If the controversy expands, we would expect Berkshire to stand center stage."

Ace Ltd., St. Paul Travelers Cos., and Zurich Financial Services AG are among other insurers that have received inquiries from regulators.

Under the policies, Berkshire typically agrees to take on losses that another insurer has incurred but not actually paid. It gets to invest the funds while it waits to make payments, and the other insurer removes liabilities from its books.

Such a policy "distorts the financial statements of the purchasing insurer," Fitch Ratings said in a report in November. "It generates an accounting result that is disconnected from the underlying economic reality."

The policies account for $10 billion, or more than 20 percent, of Berkshire's insurance reserves - the money that the company invests while it's waiting to pay claims, according to Berkshire's third-quarter earnings report.

Buffett, Berkshire's 74-year-old billionaire chairman and chief executive officer, said in last year's shareholder letter that the contracts produce "unusually large amounts" of investment funds.

Berkshire sells the policies to other insurers, Buffett said in the report, while some insurers sell them to non-insurance companies.

American International Group Inc., the world's largest insurer, was fined twice in the past year and a half for selling a nontraditional policy to Brightpoint Inc., a cellular phone distributor, six years ago.

The SEC, which said the policy was a financing tool that allowed Brightpoint to hide about $11 million in losses, fined American International $10 million last year.

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