Berkshire Hathaway’s National Indemnity in Deal to Back then Acquire Lloyd’s Equitas

Broadway producers call them “angels:” rich people who put up the money to fund their shows. In that sense, Equitas, the Lloyd’s vehicle set up in 1996 to run off a mountain of asbestos and environmental claims, has just found an archangel in the form of Berkshire Hathaway’s subsidiary National Indemnity.

In a joint announcement the two entities said they have reached an agreement in principle – subject to approval from Lloyd’s, the Names and the U.K.’s Financial Services Authority (FSA), on a structure in which National Indemnity will undertake to:
– Reinsure all Equitas’ liabilities;
– Provide up to a further $7 billion of reinsurance cover to Equitas;
– Take on the staff and operations of Equitas and conduct the run-off of Equitas’ liabilities.

The bulletin said: “The transaction will occur in two phases:
– In Phase I National Indemnity Company will provide reinsurance cover to Equitas of $5.7 billion over and above the 31 March 2006 reserves ($8.7 billion) of Equitas less adjustment for payments and recoveries since that date. The premium payable to National Indemnity Company will be:
(i) all of Equitas’ assets less £172 million [$324 million]; and
(ii) a contribution of £72 million [$135.67 million] from the Corporation of Lloyd’s.

“In this phase the staff and operations of Equitas and the management of the run-off will all pass to an English subsidiary of Berkshire Hathaway.

“- In Phase II Equitas will seek approval of the High Court to transfer all the liabilities of Reinsured Names into Equitas or a subsidiary of Berkshire Hathaway. If such a business transfer occurs before the end of 2009 National Indemnity Company will provide up to $1.3 billion of additional reinsurance cover for a further premium of up to £40 million [$75.4 million]. At the time of any such business transfer, or on 31 December 2009 if a transfer has not occurred, Lloyd’s will provide a further contribution of £18 million [$34 million].

“If both phases of the transaction are completed underlying policyholders will have the benefit of up to an additional $7 billion of reinsurance cover. This will nearly double the assets available for the run-off of Equitas.”

The reaction was immediate and positive. Lloyd’s Chairman, Lord Levene, stated: “This agreement marks a significant milestone for Lloyd’s. It enables us to close a chapter in Lloyd’s history and move forward. We have always had every confidence in the management of Equitas and their ability to achieve a solvent run-off. This additional protection, however, is very valuable to Names who were originally reinsured by Equitas and who will now achieve finality post transfer.”

Standard & Poor’s Ratings Services revised its outlook on the entire Lloyd’s insurance market and the Society of Lloyd’s to positive from stable, as well as affirming its “A” insurer financial strength and counterparty credit ratings (See related article).

Equitas Chairman Hugh Stevenson commented: “This is wonderful news for Reinsured Names. Equitas has achieved a great deal since it was set up in 1996 but we still face many threats and uncertainties. This agreement with one of the world’s largest insurance groups will transform the outlook for Equitas and for Reinsured Names. The $5.7 billion of extra cover will dramatically improve the financial position of Equitas. We believe that following the completion of Phase I Reinsured Names will be able to regard the prospect of the failure of Equitas as extremely remote. If, as we hope, a transfer of the liabilities from Reinsured Names is achieved, they will no longer have any liability whatsoever under policies reinsured by Equitas. They will have achieved finality and be able to sleep soundly knowing that this chapter is closed.”

Scott Moser, Equitas CEO, added: “This deal represents the validation of our decade-long strategy of reducing the size and volatility of Equitas to the point that we could achieve a transformational event of this kind to provide real security to Reinsured Names.”

The deal with National Indemnity should bring to a close the most disastrous overall event in Lloyd’s history. By 1996, when it set up Equitas, there were doubts that the Lloyd’s market could survive. In 2000 the European edition of Time Magazine featured a 20-page article predicting its demise. But, as Mark Twain is said to have remarked, “the news of my death has been greatly exaggerated.” Lloyd’s survived, and it now looks as if this sorry chapter in its history will become history as well.

The last word should come fittingly from the “Oracle of Omaha,” Berkshire Hathaway’s long-time Chairman Warren Buffett, who stated in the bulletin: “A decade ago, Equitas was launched in order to resolve innumerable problems involving the most complex of insurance issues. Skeptics were many and vocal. But the management of Equitas was equal to the task, and its efforts have enormously benefited insureds, Names, Lloyd’s and the general reputation of U.K. industry. Their skill in resolving complicated and contentious matters allows the transaction announced today. Much, however, remains to be done. Putting Berkshire Hathaway’s Gibraltar-like strength behind the remaining problems – which will take many decades to resolve – eliminates any remaining worries for all concerned.”