SEC’s Insurance Inquiry Includes General Re
Berkshire Hathaway Inc., the company run by Warren E. Buffett, said Thursday that securities regulators had requested information on insurance products that might help companies distort earnings.
The Securities and Exchange Commission issued the request to Berkshire’s General Re Corp. reinsurance unit and its affiliates. It is seeking information on loss mitigation insurance, also called nontraditional or finite insurance. Berkshire said it and General Re would cooperate fully.
Regulators, including New York Atty. Gen. Eliot Spitzer, have subpoenaed or requested information from several insurers on such policies, which are being scrutinized as a possible way for companies to hide losses.
Omaha-based Berkshire, which also owns auto insurer Geico Corp., had not previously been implicated in regulatory probes into insurance practices.
“The culture at Berkshire is such that they would congenitally be unlikely to play anywhere close to the line,” said Thomas Russo, a partner at investment management firm Gardner Russo & Gardner.
“It is possible that an individual could have fallen short of Berkshire’s standards or the law, but it’s unlikely given Berkshire’s culture,” he added.
Russo’s firm invests 8% of its roughly $1 billion of assets in Berkshire shares.
Ace and St. Paul Travelers are among other companies that regulators have contacted on similar products.
American International Group Inc., the largest insurer by market value, was fined $10 million by the SEC in 2003 and $80 million by the Justice Department last month over a nontraditional contract it sold cellphone distributor Brightpoint Inc.
A Berkshire spokeswoman and SEC spokesman John Heine declined to comment. Brad Maione, a spokesman for Spitzer, declined to say whether the attorney general requested information from or subpoenaed General Re.
Gary Ransom, an analyst at investment banking firm Fox-Pitt Kelton Inc., last month said the finite insurance at issue can have the effect of smoothing earnings, even if that is not its primary purpose.
Regulators are questioning whether such products can function as loans to help camouflage earnings weakness.
Based in Stamford, Conn., General Re is one of the world’s biggest reinsurers, which spread risk among insurance companies. It generated $5.59 billion, or 10.3%, of Berkshire’s $54.4 billion in revenue from January to September, Berkshire’s quarterly report shows.
Buffett is the world’s second-richest person, with a recent net worth of about $41 billion, according to Forbes magazine.
Berkshire’s Class A shares rose $400 to $89,200, and its Class B shares fell $9 to $2,956, both on the New York Stock Exchange.
Other insurance practices that regulators are examining include the steering of business to favored providers, not those offering the best terms, in exchange for lucrative fees.
On Thursday, employee benefits consultant Watson Wyatt & Co. Holdings said Spitzer subpoenaed it regarding insurance placements, including fees known as “override payments” that it received from brokers.
