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Berkshire to assume Equitas liabilities
Date: October 21, 2006
Oct. 21--Warren Buffett has signed one of the biggest deals of his career, a multibillion-dollar agreement that would resolve the decade-long uncertainty over the future of Lloyd's of London.
Buffett's Berkshire Hathaway Inc. said Friday it would provide up to $7 billion in insurance coverage for Equitas, a division set up by Lloyd's in 1996 to resolve billions in potential claims for asbestos injuries, natural disasters and other risks assumed by Lloyd's from the 1930s to 1992.
The agreement, subject to approval by government regulators and due to take effect by April 2007, calls for Berkshire to take over all of Equitas' liabilities and its $8.7 billion in existing insurance reserves and to receive payments of $749 million.
Officials of Equitas hailed the proposed arrangement as resolving the long-term claims that nearly destroyed Lloyd's. Buffett, chairman and chief executive of Berkshire, said Equitas' managers have performed well over the past decade.
"Much, however, remains to be done," Buffett said in a press release. "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."
Buffett praised Equitas for resolving many of the most complex insurance issues and benefiting people who were insured, Lloyd's and its 34,000 investors or "names," and the general reputation of the British insurance industry.
Equitas started with more than $28 billion in liabilities, especially the asbestos claims, and assets of 5 percent above that. Since then Equitas has been running off those liabilities -- paying billions of dollars in claims with money from its investments while writing no new insurance coverage.
The run-off process includes negotiating payments to people and businesses rather than going to court. Some observers have doubted that Equitas would succeed, given the potential size of asbestos claims -- an estimated $200 billion in the United States alone, although not all are insured by Lloyd's.
Lloyd's names are still liable for claims if Equitas doesn't resolve them. They may receive a payment if the Berkshire transaction succeeds.
The transaction announced Friday could nearly double the assets that Equitas would have available for claims. It would take place in two phases.
In the first, National Indemnity would provide $5.7 billion in coverage, with the operations of Equitas passing to an English subsidiary of Berkshire.
In the second phase, Equitas would ask a British court to transfer the liabilities of the Lloyd's investors to Equitas or Berkshire. If that happens by the end of 2009, National Indemnity would provide another $1.3 billion in insurance coverage.
Fitch Ratings of Chicago, which reaffirmed Berkshire's top-level credit rating, said that even if the Lloyd's losses reached their maximum, they would amount to no more than one year's net income for Berkshire and less than 10 percent of its capital.
Buffett has studied the asbestos situation for years, saying in 2001, "We stay a million miles away from asbestos." The building insulation material was used widely in the mid-20th century and later blamed for cancer and other illnesses, leading to substantial court judgments.
But he said concerns about asbestos actually might help Berkshire if it could acquire some good companies after they have settled their asbestos problems by going through bankruptcy.
In 2001, Berkshire purchased Johns Manville, a Denver-based building materials company that had filed for bankruptcy protection in the 1980s because of asbestos-related injury claims. Johns Manville remains a part of Berkshire's building products division, which earned $751 million on revenues of $4.8 billion last year.
The U.S. Congress is considering legislation that would set up a fund to pay billions in potential asbestos claims, although the proposal failed this year. Some lawmakers opposed the measure, saying some deserving people would lose the right to sue for damages and not all insurers would be treated fairly.
Much of the asbestos liability came to Lloyd's through reinsurance contracts. From 1988 to 1992, Lloyd's lost $15 billion on a series of asbestos, natural disaster and pollution claims.
"The problems of the 1990s continued to cast a shadow over Lloyd's," said Michael Deeny, chairman of the Association of Lloyd's Members, which represents names. "That shadow has now been removed."
Before 1996, "Lloyd's was facing huge losses that threatened its very existence," said Chairman Hugh Stevenson in a conference call with journalists. The objective of Equitas was to achieve "finality of liabilities" for the investors who underwrote those claims.
"I'm glad to say it looks like we have done just that," he said.
Stevenson said the agreement is "wonderful news" and would make the prospect of Equitas failing "extremely remote."
If the transaction succeeds, he said, Lloyd's names would have no more liabilities under the Equitas policies. "They will have achieved finality and be able to sleep soundly knowing that this chapter is closed."
This report includes material from Bloomberg News.
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