False Claim Over Berkshire Spurs CEO Exit at Brazil’s IRB

(Bloomberg) -- The Brazilian re-insurer that made false claims about a Berkshire Hathaway Inc. investment is scrambling to contain the fallout.

IRB Brasil Resseguros SA’s chief executive officer and finance chief resigned late Wednesday, just days after its chairman quit. In an impromptu conference call Thursday, their interim replacements sought to calm investors and move past the month-long drama that has wiped out more than half its market value -- about $5.3 billion through Wednesday’s close.

The Berkshire issue is “a serious problem,” said interim Chairman Pedro Guimaraes, adding that IRB’s board acted quickly in changing management and an internal investigation will be conducted. “We don’t condone and will never condone any kind of wrongdoing.”

IRB’s stock has been in freefall since Feb. 2, when short seller Squadra Investments released a 150-page report disclosing a bearish position and questioning IRB’s profit figures. IRB management began quietly reassuring investors in conference calls that all was well and later hyped that supposed Berkshire stake as proof, according to analysts on the call and local media reports. Not true, said Warren Buffett’s holding company this week, and the stock tumbled anew.

“Berkshire Hathaway Inc. is not currently a shareholder of IRB, it has never been a shareholder of IRB and it has no intention of becoming a shareholder of IRB,” Berkshire said in a statement on Tuesday.

Executive Exits

IRB announced the exit of CEO Jose Carlos Cardoso and CFO Fernando Passos in a regulatory filing and said Werner Suffert, a former member of the board, took over as CFO and interim CEO. Chairman Ivan Monteiro resigned on Feb. 28. His interim replacement, Guimaraes, is the CEO of state bank Caixa Economica Federal.

Following Thursday’s call, IRB Brasil initially rose before erasing gains and falling 8.9% to 17.36 reais as of 1:50 p.m. in Sao Paulo trading. It follows a 32% plunge on Wednesday after Berkshire’s denial.

While fairly common in other parts of the world, it’s rare in Brazil for short sellers to publicly point the finger at a specific company and lay out their rationale as thoroughly as Squadra did in its report.

Squadra, with 4.2 billion reais ($917 million) in assets under management, said IRB included one-offs in its recurring pre-tax income figures. IRB, which has declared itself the most profitable company in the global re-insurance sector, pushed back and called up banks including Morgan Stanley and Santander Brasil to explain how its higher-than-average return on equity is sustainable.

Guimaraes said on the call that while the board is comfortable with IRB’s balance sheet, it plans to boost transparency in the information that it releases. For now, IRB is sticking by its guidance for the year as Suffert reviews the figures. The board will also change how top executives are compensated, reversing a policy to tie bonuses to stock performance.

Alleged Claims

Brazil’s Eleven Financial Research said in a report that it took part in a conference call held by IRB on Monday in which executives claimed Berkshire Hathaway International Insurance Ltd. had boosted its stake and touted a close relationship with Berkshire’s vice chairman of insurance operations, Ajit Jain. Newspaper Valor Economico reported the claims.

“There have been recent stories in the Brazilian press that Berkshire Hathaway Inc. is a shareholder of IRB Brasil Re,” Berkshire said in the statement. “Those stories are incorrect.”

Analysts at Citigroup Inc. downgraded the stock Wednesday, and Bank of America put it under review. The stock never once had a sell rating from analysts since its 2017 initial public offering.

“What happened was outside the curve, but it hurt the market a lot,” Guimaraes said. “We want your confidence back.”

--With assistance from Katherine Chiglinsky and Sabrina Valle.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Jessica Brice, Julia Leite

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