On the heels of Warren Buffett’s annual letter to Berkshire Hathaway shareholders that was silent on such matters, federal and state investigators are focusing on whether a four year old transaction between Berkshire Hathaway’s General Reinsurance Corp. and American International Group Inc. transferred sufficient risk to AIG to allow the company to account for it as an insurance policy. Here is an earlier post on this investigation.
AIG booked the transaction as insurance, which increased its premium revenue by $500 million and added another $500 million to its property-casualty claims reserves. Generally accepted accounting principles require insurance and reinsurance transactions to transfer significant risk from one party to another if either party accounts for the transaction as insurance. Absent risk transfer, such transactions must be booked as financing, which defeats the purpose of the transaction. In the General Re-AIG deal, $600 million of potential losses were transferred from General Re to AIG in return for the $500 million premium paid by General Re. Investigators are evaluating whether the risk transfer was illusory based on the structure of the transaction. AIG confirmed last month that the Securities and Exchange Commission, the Justice Department, and New York Attorney General Eliot Spitzer’s office are examining its accounting for certain reinsurance contracts.
You know, doesn’t all of this sound eerily similar to this case?