Warren Buffett: Reinsurance will slip due to Hedge Funds

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Warren Buffett, the chairman of conglomerate Berkshire Hathaway Inc., met with his shareholders at the annual company meeting this past weekend.

Among other things, Bloomberg reports that Buffet expects a slump in reinsurance results over the next decade.

The third-richest man in the world, Buffet cited lower barriers to entry in the form of hedge funds. Due to a loophole in the tax code, many hedge funds are setting up offshore reinsurers. The resulting competition combined with low interest rates is thus hurting the reinsurance industry.

This competition is problematic because many of these new reinsurance companies are not “real” reinsurance companies, but are rather companies established to help the hedge funds lower taxes. For example, billionaire hedge fund manager John Paulson set up a Bermuda-based reinsurer called Pacre Ltd which has no employees and invests almost exclusively in Paulson hedge funds.

But while Buffett worries that these new reinsurance companies would make affairs more difficult for “real” ones, the US government has begun investigating these new companies. Senator Ron Wyden (D-OR) and the Internal Revenue Service have proposed rules changes which would shut down this tax loophole.

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Buffett did stress that while the reinsurance industry may suffer difficulties, the Berkshire Hathaway Reinsurance Group and General Re will be fine. The size of these reinsurance groups will protect it from leaner times which would more negatively impact smaller reinsurance companies.

But while Berkshire Hathaway Inc. reported strong first quarter results as a whole, its reinsurance groups struggled. General Re’s premiums written in property declined 16% in Q1 while the Berkshire Hathaway Reinsurance Group complained of inadequate rates. The Reinsurance did note its “capacity and desire to write substantially more business when appropriate pricing can be obtained.”

In addition to discussing reinsurance, Buffett also discussed other issues at the meeting which CNN describes as “the Woodstock of capitalists.” He said that tax refunds were a better way to reduce income inequality instead of raising the minimum wage and that he plans to buy more IBM stock.