AUSTRALIA’S financial watchdog yesterday confirmed it had launched an investigation into General Re Australia, the reinsurance business owned by Warren Buffett.

The inquiry stems from the failure of HIH Insurance, Australia’s second biggest insurer until it collapsed in 2001 with losses of up to A$5.3 billion (£2.2 billion).

News of the investigation came as an Australian court jailed a former director of HIH for four years. Its former chief executive faces sentencing today for his part in Australia’s biggest corporate failure.

HIH’s collapse, which left tens of thousands of policyholders uninsured, has been blamed in part on the insurer’s use of complex reinsurance products called finite reinsurance. Similar products are also at the heart of an investigation by the New York attorney-general into AIG, the US insurer.

The Australian Prudential Regulation Authority said yesterday it was investigating “certain reinsurance practices” involving General Re Australia. It is understood the watchdog is looking into the sale of finite reinsurance to HIH. General Re is a subsidiary of Berkshire Hathaway, the investment vehicle run by Mr Buffett, the world’s second-richest man.

This week Maurice “Hank” Greenberg, the ousted chief executive of AIG, used his Fifth Amendment right to silence to refuse to answer questions from Eliot Spitzer, the attorney-general, over finite reinsurance contracts that inflated AIG’s reserves by $500 million.

Mr Buffett is believed to have told the attorney-general that he knew few details of the AIG transaction. He has also argued that General Re sold the finite reinsurance to HIH before Berkshire Hathaway acquired the reinsurer.

Finite reinsurance is a little-understood mix of insurance and financing that enables companies to remove certain risks from their balance sheets.

Yesterday Rodney Adler, a former director of HIH Insurance, was jailed by a Sydney court for four years after pleading guilty to giving false information to induce people to buy HIH shares, lying to obtain a A$2 million loan from HIH for a company in which he had invested, and failing in his duties as a director.

Justice John Dunford told the New South Wales State Supreme Court that Adler had shown an “appalling lack of commercial morality”.

Today HIH’s founder and former chief executive, Ray Williams, faces being sentenced to up to 12 years in jail, after admitting being reckless and failing in his duties as a director, authorising a prospectus containing a material omission, and making or authorising a misleading statement to inflate profit.

Another HIH executive, Bill Howard, was given a suspendded three-year sentence in 2003 on two counts of criminal misconduct.

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