Insurance probes reach top execs; AIG's Greenberg, Berkshire's Buffett become involved

CBS MarketWatch.com ^ | 3/7/05 | Alistair Barr

[SierraWasp]

Insurance probes reach top execs
AIG's Greenberg, Berkshire's Buffett become involved

By Alistair Barr, MarketWatch Last Update: 3:06 PM ET March 7, 2005

SAN FRANCISCO (MarketWatch) -- Insurance investigations that began last year have now reached the very top of the industry.

Maurice "Hank" Greenberg, chairman and chief executive of American International Group, the largest insurer in the world, and Warren Buffett, the billionaire investing legend who heads Berkshire Hathaway, have become involved in the probes in recent weeks.

"The icons of the business now are being called on to explain some of their transactions," said Andy Barile, an insurance industry consultant in Rancho Santa Fe, Calif.

At the center of these inquiries is a product called "finite" or "loss-mitigation" insurance or reinsurance. Companies buy it to protect themselves against the financial impact of future liabilities.

While the product has been used legitimately for decades, regulators are concerned that some companies have been using it to improperly smooth financial results.

"The biggest insurance companies are involved in finite risk reinsurance -- these agreements are common throughout the whole industry," said Barile, author of two books on the subject: "A Practical Guide to Financial Reinsurance" and "A Practical Guide to Finite Risk Insurance and Reinsurance."

The U.S. Department of Justice, Securities and Exchange Commission and New York Attorney General Eliot Spitzer are investigating a finite reinsurance transaction between AIG and Berkshire's General Re division, the Wall Street Journal reported Friday, citing people familiar with the probe.

Greenberg personally called General Re's chief executive at the time, Ronald Ferguson, in late 2000 to set up the deal, the newspaper explained.

Regulators are trying to find out whether AIG (AIG: news, chart, profile) used the agreement to artificially bolster premiums and loss reserves in its 2000 results, the paper added.

Spokesmen from the SEC and Spitzer's office declined to comment. The Justice Department and AIG didn't return calls seeking comment.

Spitzer and the SEC are also reportedly considering probing similar deals between AIG and Coral Re, a Barbados-based company set up by Goldman Sachs (GS: news, chart, profile) in 1987 to reinsure policies sold by AIG. See full story.

AIG was also implicated in Spitzer's October bid-rigging lawsuit against Marsh & McLennan (MMC: news, chart, profile) , the top insurance broker formerly run by Greenberg's son Jeffrey.

The recent intense regulatory scrutiny has weighed on AIG shares and revived speculation that Greenberg may step down after more than 30 years running the insurer.

Before Monday, AIG shares had dropped almost 11 percent from the middle of February. The stock recovered 2 percent to $66.39 in afternoon trading Monday.

"Unless Mr. Maurice Greenberg is directly linked with a serious crime like the specific bid-rigging that happened between Marsh and the excess casualty unit at AIG, he will remain in office," Paul Newsome, an analyst at A.G. Edwards, wrote in a note to investors Monday.

General Re received subpoenas in January from the SEC and Spitzer relating to its sale of finite reinsurance, according to Berkshire's (BRKB: news, chart, profile) annual report which was released Saturday.

The company didn't specifically comment on the General Re transaction with AIG that's being investigated. The company also didn't return calls requesting comment Monday.

The Justice Department and the U.S. Attorney for the Eastern District of Virginia are also investigating finite reinsurance sold by General Re to failed liability insurer Reciprocal of America. See full story.

It's unclear how closely Buffett is involved in these investigations. However, the hint of impropriety at one of his divisions is unusual for a person who is known for speaking out against unethical behavior in business.

Dreyfus Neenan, an insurance equity analyst at Morningstar, said Buffett's reputation should remain intact, partly because many of the General Re agreements being probed were probably drawn up before Berkshire (BRKA: news, chart, profile) acquired the firm in 1998.

"Berkshire Hathaway stands at the center of the marketplace for finite reinsurance products because they've got such a strong balance sheet," Neenan said. "Regulators have seen an opening and they're probing that now, but whether anyone's done anything wrong will be up to the lawyers."(emphasis added)

Finite reinsurance is good for the industry because it helps insurers stay in business when they're struggling with losses from past policies, Neenan explained.

The main question regulators are asking is whether sufficient risk was transferred by some finite reinsurance products and how those transactions were accounted for in financial statements, he said.

"The key question is whether sufficient risk was transferred and there are probably good lawyers who can argue either way on that," he added.

[SierraWasp]

Democrats and Leftists in our government so despise the private sector Insurance industry because they want it ALL nationalized like Hitlery wanted all health insurance. Afterall, you can't have a true national nanny government with the greatest traditional insurance industry on earth remaining in the free market as free enterprise in the private sector... They will be forced to "BRING IT ALL DOWN, MAN!"

We cannot have "economic and social justice" until that happens... "No justice, no peace," and no piece of the rock, either you flamin Capitalists!!!(/full blown sarcasm)

[SierraWasp]

I think it's time for the insurance industry to invent "wildassed politically driven prosecutor insurance," complete with an off-shore reinsurance scheme to round everything out!!!

[Toddsterpatriot]

"Berkshire Hathaway stands at the center of the marketplace for finite reinsurance products because they've got such a strong balance sheet," Neenan said.

Maybe old Warren is buying foreign currencies so he'll have some dough when he flees the country.

[danno3150]

Great campaign strategy, Elliot. I think someone needs to explain to Spitter that he's got the whole "Scorched Earth Policy" thing backwards.

[SierraWasp]

Well here's Friday's thread on the old coot!!!

The old goat is finally reaching the ultimate end of "The Peter Principle!"

[SierraWasp]

He wants to "book 'em, danno!"

Instead he's gonna "brick 'em" like that old joke about how to make your camel go further without stopping for a drink as quickly as normal... (If you don't know, I ain'ta gonna tell ya!!!)

[SierraWasp]

Here's one I forgot to ping you to, just now!

[roaddog727]

Not to worry.

Watch out Warren!

Ther comin' ta' git-cha

[Southack]

"regulators are concerned that some companies have been using it to improperly smooth financial results."

You'd read that one sentence and hardly expect that anything improper had gone on...

...but financial "smoothing" is a bad thing. It's also known as "sandbagging."

Smoothing or sandbagging is when you rig your books to hide profits in good years in such a way that you can show fake profits in bad years...thus, the numbers average out over time to appear more "smooth" to your investors.

But this process is deceptive, and it is damaging in the sense that diligent investors aren't being shown the true risk picture that company faces in any given year.

It's great for making your bonus targets year after year if you're a CEO, and it makes your company's balance sheets appear unnaturally stable to the financial press, though.

Still, it's deception. Hardly something to be tolerated, even if some people hold up Buffet as a capitalistic super-lord.

[Dog Gone]

It's hard for the ordinary American to make a judgment on these kinds of matters, especially those with limited knowledge of financial and corporate structures, rules, and regulations.

Even the average investor reads little more than the summary page of the annual report of these companies.

There has been plenty of abusive prosecution of companies by attorneys general seeking to make a political name for themselves, while it's also inarguable that some companies will cook the books to deceive investors and in an effort to stuff the pockets of company officers with loot.

[BOBTHENAILER]

"wildassed politically driven prosecutor insurance,"

What a wonderful idea. One that political has-been (chuckle) what's his name? (Kerry's VP) no doubt would not support.

Interesting that Buffet might be included.

[SierraWasp]

I think you are way off base here. Because, all they're doing is as Saint Joseph told the Pharoah to do about that dream of seven years fat, followed by seven years lean.

Everybody reserves for bad years to allow some smoothing! Even households and it's prudent to do so! These big guys have to do a heck of a lot of smoothing, reserving, even reinsuring to spread some terribly devastating risks like multiple hurricanes in one year, etc.

What the heck are you thinking? Do you want them to come up short and not be able to pay claims and be forced to come crawling to Uncle Sam for help like Chrysler and the Airlines have been doing??? That's what the Dems want, but it surely should NOT be what any Conservative wants to have happen to one of our oldest and strongest industries!

Sometimes you just surprise the heck out of me... really!!!

[SierraWasp]

Let me pile-on here just a bit more...

The Insurance Industry has been regulated by the 50 states on insurance business matters. If companies don't reserve adequately, the various states can shut 'em down till they do reserve correctly, or raise rates to achieve a proper trend toward adequate reserves!

I think it's funny that the SEC is shadowing Eliot Ness, I mean Spitzer, since NY State is supposed to be supervising the industry through their Insurance Commissioner! The Feds and the SEC can only get after 'em if they are ripping off investors on falsifying profits and it's all been made, partly in self defense against excessive regulation, quite murky... especially to even somewhat sophisticated investors, let alone novices.

Every little puff of smoke does not indicate a "Towering Inferno," and I'm sure ol Buffett will splain it to Spitzer's peanut whistle lieutenants before much longer. Meanwhile Spitzer knows it makes him look soooooohoho good to be peein all over these big dogs over seemingly inexplicable intracacies of the insurance biz!!!

[calcowgirl]

I'm no expert in insurance, but I thought the issue being investigated with the loss-mitigation insurance was these companies may not be reserving properly, hence they are way overstating their revenues/worth.

I agree that companies set up reserves all the time and that is appropriate. This sounds like more than that. Here's one article:

http://www.nytimes.com/2004/11/16/business/16insure.html

[Dog Gone]

Spitzer shows every indication of being one of those attorneys general who is doing this solely to build his political career. I wouldn't trust him any further than I could spit him.

[SierraWasp]

Well, it could be more than that and I may just be irritated that this Spithead is trying to overplay his hand and make it look like the insurance industry is acting like the local drug lords, bichin about somebody bringin down too much heat for no good reason... I'm just prejudiced as hell against overly aggressive litigators and allegators in both public and private life!!! That's all...

I get so sick of the attorney industry lookin down it's collective nose at most other successful industries and constantly pickin on 'em, just like the super-self-righteous media knot-heads!!!

Thank God all attorney's aren't that full of themselves. I do get tickled at that one on Sunday night by Captain James T. Kirk. He's the most arrogant prick ever to exist and he knows it and he just loves bein that way!!! Too funny!!!

[dirtydanusa]

...but financial "smoothing" is a bad thing. It's also known as "sandbagging."

My wife worked for an insurance firm that would "Hide" the big dollar claims in a box hidden under a desk. These Claims would be paid depending on the budget for that given period. They would use the endless paperwork loop to slow down the process sometimes for years. >