Buffett Insurance Deals Warrant Spitzer Scrutiny

Down Under

And this isn't the only odd-looking financial reinsurance deal to bring the spotlight onto a Buffett company. Berkshire's National Idemnity did a financial reinsurance deal that allegedly helped disguise serious problems at a now-defunct Australian insurance company called FAI.

Soon after the financial reinsurance deal, Australia's largest insurance company, HIH, bought FAI, whose problems helped bring about HIH's dramatic collapse in 2001. An Australian judicial investigation reveals in lurid detail the critical role that Ajit Jain, still a senior executive at Berkshire, played in the deal. Buffett showered Jain with praise soon after his involvement in the Australian deal was reported, and is said to remain very close to the executive.

Financial reinsurance also appears to have played a big role in a huge dispute between a group of Japanese insurance companies and a now-collapsed aviation insurance company called Fortress Re, which was based in Burlington, N.C.

In December last year, an arbitration panel ordered Fortress principals to pay one of the Japanese insurers over $1 billion in damages. The Japanese insurers had alleged that Fortress misrepresented its financial health, partly by using financial reinsurance to make it look like it had laid off risk, when in fact it hadn't.

Financial reinsurance is also heavily used by large U.S. subsidiaries of Canada's Fairfax Financial (FFH Quote). This column has often argued that the product may have been used by Fairfax to make its financials look better than they really are. While Fairfax's U.S. state regulators do seem in the course of normal business to have had a good look at some of its financial reinsurance deals, it's not clear why some have gotten the capital treatment that they have. Fairfax didn't respond to a request for comment.

Clearly, Spitzer isn't going to want to get bogged down in arcane insurance accounting. But if incriminating emails come his way from insurance insiders -- as they have from whistleblowers from firms in other sectors -- he shouldn't be that surprised if they concern financial reinsurance. There's much to suggest that abuses connected with financial reinsurance could dwarf anything seen so far in Spitzer's insurance crusade.