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Buffett invests in Lloyd's insurer consolidation
By Andrew Bolger in London
Published: July 13 2004 21:45 | Last Updated: July 13 2004 21:45

Warren Buffett, the famed US investor, is backing a plan to consolidate the fragmented insurers of Lloyd's of London, in the first step of what could be a radical shake-up of the world's largest insurance market, which can write 15bn ($27.8bn) of premium annually.

Mr Buffett's Berkshire Hathaway Group is described as a "cornerstone" investor in Capital Insurance Holdings, a new business set up to buy up smaller quoted companies at Lloyd's.

The need for consolidation among quoted Lloyd's vehicles has long been acknowledged because of the relatively high costs of listing faced by small companies and their vulnerability to large one-off insurance losses. The involvement of Berkshire Hathaway will add credibility to the consolidation initiative and provide acquired companies with access to one of the world's largest reinsurers, General Re.

But consolidation has hitherto been blocked by the difficulties of putting together small businesses dominated by strong personalities who are used to working autonomously.

Capital - led by Michael Wade, a long-standing proponent of consolidation - believes investors are now more open to deals. The companies' share prices have languished because they were too small to receive proper attention from analysts and institutional investors.

Although the four largest quoted Lloyd's insurers have market capitalisations ranging from 438m to 789m, the remaining nine had an average valuation of just 133m, Mr Wade said.

Capital intends to raise 125m through an institutional placing at the end of this month . It said it would seek share-for-share mergers rather than cash offers at premiums to prevailing market values, and would focus on companies with sufficient capital to satisfy their anticipated needs.

Berkshire will take a 25 per cent stake in Capital, which will acquire Euclidian, an unquoted insurer at Lloyd's to which Mr Buffett's vehicle already provided reinsurance.

"We will start moving on deals the day we have the listing," Mr Wade said. "We obviously have one or two ideas, although nothing we can announce yet. But we know investors are keen to see consolidation in this sector."

Capital also said it would work with Berkshire Hathaway to obtain reinsurance to protect the company against exposure to historical liabilities - particularly "long-tail" liabilities such as asbestos.

Mr Buffett is no stranger to the Lloyd's market, having previously provided capital support to Wellington, one of the larger Lloyd's insurers.

Lloyd's incurred huge losses as a result of the terrorist attacks on the United States of September 11 2001 but bounced back to unveil record annual profits of almost 2bn for last year.

Mr Wade said there would be a clear division of responsibilities between Capital Insurance, as the provider of capital, and its underwriting units, which would be encouraged to be independent and maintain their entrepreneurial skills. Each underwriting unit would retain its own brand and management team, who would be charged with optimising underwriting returns.

Mr Wade said Capital had worked out a remuneration scheme with Deloitte, the accountants, which would enable the group's most successful underwriters to earn annual bonuses in excess of 1m.

A former chief executive of CLM, a Lloyd's vehicle that merged with another, SVB Holdings, in 1999, Mr Wade is chief executive of Rostrum, an investment management group that three years ago quietly invested 70m in Lloyd's vehicles on behalf of some of the UK's biggest pension funds in the hope of sparking consolidation in the sector.

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