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Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said he expects a slump in reinsurance results in the coming decade as investors enter the market.

“It’s a business whose prospects have turned for the worse and there’s not much we can do about it,” Buffett said Saturday at his company’s annual meeting in Omaha, Nebraska. The reinsurance industry in the next 10 years “will not be as good as it has been in the last 30.”

Hedge funds are setting up offshore reinsurers to gain a tax advantage, underwriting a small amount of business as a “facade,” Buffett said. Competition has driven down prices, while low interest rates pressure bond portfolios.

Hedge fund managers including Daniel Loeb and David Einhorn have set up offshore reinsurance companies to support their investing strategies. Pension funds, sovereign wealth funds, and endowments are also providing capital to insure catastrophe- related risks.

The Internal Revenue Service is looking to narrow the loophole that allows U.S. hedge fund managers to lower personal income tax bills by routing hedge-fund investments through an insurance company in a low-tax offshore jurisdiction like Bermuda. Billionaire John Paulson and JPMorgan Chase & Co.’s Highbridge unit both have Bermuda units and may be at risk from the IRS proposals.

Buffett said Berkshire still is in a strong position in the reinsurance industry because of its ability to take on large risks. Reinsurers sell coverage for primary insurers, and reinvest premiums earned.

XL Group Plc Chief Executive Officer Mike McGavick said in a Bloomberg Television interview Friday that there’s room for growth among reinsurers or specialty carriers that are “at the cutting edge of innovation.” He cited the opportunity on risks tied to cyber-security.

–With assistance from Margaret Collins in New York.

Topics Reinsurance