3 FINANCIAL TIMES ARTICLES ON BUFFETT ANNOUNCEMENT, Oct. 21, 2006
Deal will finally bring peace of mind for Names LLOYD'S NAMES; [LONDON 1ST EDITION]
ANDREA FELSTED. Financial Times. London (UK): Oct 21, 2006. pg. 17
The deal with Warren Buffett could free all the Names that purchased insurance from Equitas, or who wrote policies at Lloyd's decades before its creation, from any potential liabilities.
This outcome would be a huge relief for some 34,000 Names, or their estates, who could, in theory at least, still be chased through the shires for their share of claims.
Equitas was created just over 10 years ago. It took responsibility for mainly US pollution and asbestos liabilities outstanding on Lloyd's policies sold before 1993.
As part of a rescue plan to save Lloyd's from collapse, 34,000 Names paid Equitas a premium to effectively take on their pre-1993 liabilities.
Christopher Stockwell, chairman of the Lloyd's Names Association, said: "Obviously we want to see the terms, (but) if that removes the reinsured Names from the firing line for good, then I would say it is very good news for Names and Lloyd's."
The deal with Mr Buffett's Berkshire Hathaway group has two components.
The first is the purchase of $5.7bn (£3bn) worth of reinsurance cover above Equitas's reserves - provisions set aside to meet future claims - of $8.7bn at March 31 2006. For this, Equitas and Lloyd's are effectively paying £358m.
The reserves of $8.7bn will be transferred to Berkshire unit National Indemnity, along with £268m, comprising Equitas's surplus of £458m, less £172m. Lloyd's will also contribute £72m.
For this, Equitas gets the extra $5.7bn of reinsurance. It is also expected that at this stage, a small amount of money will be paid to the Names who acquired insurance cover from Equitas.
Scott Moser, chief executive of Equitas, says phase one alone should bring peace of mind to Names. But there remains the possibility, in theory at least, that if Equitas were to fail, liabilities would fall back on Names.
The bigger prize, therefore, would be a successful completion of the second phase, in which Equitas will seek the approval of the High Court to transfer all the liabilities of reinsured Names into Equitas or a subsidiary of Berkshire Hathaway. If this were successfully completed, it would mean that all Lloyd's Names' residual liability would be transferred or "novated".
Mr Moser is optimistic that Equitas will be able to convince the courts that this will be a better outcome for policyholders.
In its armoury will be an extra $1.3bn of reinsurance, which Equitas could purchase in the event of a novation, taking the total amount of reinsurance to $7bn. The premium for this extra cover would be £40m.
Lloyd's will contribute £18m, whether the transfer takes place or not.
Mr Moser hopes to convince the courts that it would be "better for policyholders having this additional reinsurance rather than chasing individual Names".
It is also possible that with a successful completion of phase two, there could be a further distribution to Names. Lloyd's will also be hopeful that approval is forthcoming.
Under phase one, it too could theoretically still have some exposure if Equitas were to fail, through indemnities it provided to Lloyd's subsidiaries reinsured into Equitas, or pressure from regulators to ride to Equitas's rescue.
Lloyd's insiders say that even in phase one, the $5.7bn of additional reinsurance makes those theoretical possibilities even more remote.
In the event of a novation, or transfer of liabilities, Lloyd's should rid itself of its theoretical exposures.
But the deal does leave just over $400m in trust funds in the US, to meet Equitas's liabilities in the event of its failure. It is not clear whether Lloyd's can successfully ring-fence these funds.
Buffett moves after Equitas success The Sage of Omaha has wooed Lloyd's as the view on liabilities got clearer, writes Peter Thal Larsen; [LONDON 1ST EDITION]
PETER THAL LARSEN. Financial Times. London (UK): Oct 21, 2006. pg. 17
Warren Buffett often invites companies that want to be part of Berkshire Hathaway, his investment company, to get in touch.
"If you have a business that fits (our criteria), give me a call," the legendary investor wrote in Berkshire's most recent annual report. "Like a hopeful teenage girl, I'll be waiting by the phone."
When it came to striking a $7bn (£3.7bn) reinsurance deal with Lloyd's of London, however, the 76 year-old Mr Buffett played the suitor.
Earlier this year he asked Ajit Jain, who oversees Berkshire's reinsurance activities, whether it would be possible to explore a deal with Equitas, the unlisted company responsible for Lloyd's liabilities before 1993.
The two men had discussed the possibility of a deal a few years ago but abandoned the idea after concluding the liabilities were still too hard to quantify.
When Equitas published its last set of accounts in June, they decided to look at it again.
In an interview with the Financial Times, Mr Buffett says the decision to explore a deal is a reflection of Equitas' success.
"Equitas has made a lot of progress in terms of resolving a great number of questions including in respect to liabilities," he says.
"It will be long after I am dead before we know the final answers on how it all works out. But it's easier to make that assessment than it would have been five years ago."
Until recently, the notion of anyone reinsuring Equitas would have been unthinkable.
When it was set up in 1996 as part of the plan to rescue Lloyd's, many believed it was doomed to failure. Through a combination of skilful management and good fortune, however, it had reduced its liabilities to £4.4bn by March 2006, while maintaining a surplus of £458m.
Yet for Lloyd's Names - the individuals who had traditionally supported the market and whose liabilities Equitas was set up to manage - the arrangement never provided complete relief.
If Equitas failed, the names would once again face unlimited claims on their assets.
Indeed, every year the 28,000 Names who are still alive have to provide their address to the Department of Trade and Industry, which has promised the US government to keep tabs on their whereabouts in case claimants need to track them down in future.
If Mr Buffett's proposed deal is completed, Equitas will eventually ask the High Court to transfer the Names' liabilities to Berkshire.
Even after the first stage of the transaction - which provides a further $5.7bn of reinsurance to Equitas - Mr Buffett believes the Names should be able to relax.
"There is a final adjudication that would put the formal stamp on (the transfer). But $5.7bn is a lot of money to go through above the carried reserves, and as a Name I would feel that the Equitas management had put this matter to bed," he said.
Moreover, the deal will leave Equitas with reserves of about £150m. Some of this will be needed to cover legal fees, but some will also be returned to the Names.
The possibility of a failure of Equitas has also loomed over Lloyd's for much of the past decade.
The insurance market has consistently denied any liability for claims arising before 1993. But Lloyd's decision to pay £90m to Berkshire as part of the deal, and yesterday's decision by Standard & Poor's and Fitch to consider upgrading its credit ratings for Lloyd's demonstrates the importance of Mr Buffett's move.
"If they have found a solution that ends the question of what to do with the pre-1993 Lloyd's Names, then that is worth paying for," says one observer.
This week's agreement caps a long association with Lloyd's for Mr Buffett, who, as the owner of one of the world's largest reinsurance companies, has always taken a keen interest in the market.
Two years ago Berkshire took a 25 per cent stake in a vehicle that was aiming to buy up smaller Lloyd's underwriters.
The plan flopped, but few doubt that Mr Buffett and Mr Jain have a sharp commercial nose.
"The Berkshire team are without question one of the most authoritative teams in the world in this business, and they have the strongest balance sheet," says Michael Wade, an insurance executive who spearheaded the failed consolidation.
Scott Moser, Equitas chief executive, says: "It's a transfer of risk from people who shouldn't be taking these risks to the leading people in the industry."
In spite of the significance of the transaction for Lloyd's names, there is no question that Berkshire's deal with Equitas is motivated mainly by the opportunity to make a profit.
"Berkshire will have worked out that they can make good money out of the deal," one Lloyd's veteran observes, adding: "There is no sentiment involved."
But Mr Buffett insists the Equitas executives drove a hard bargain in reducing the assets that Berkshire is taking over by £172m.
"In the end, it's like any other insurance premium: the insurer never thinks he got enough and the insured always thinks he paid too much. That's the nature of insurance."
He acknowledges that Equitas has made great strides in managing liabilities such as exposure to US asbestos and pollution claims, some stretching back decades.
But he also stresses the considerable uncertainties it still faces.
"When you are taking on a book with thousands of policies that were written over many years, it's the surprises that worry you. And no amount of due diligence can give you 100 per cent assurance on that," Mr Buffett cautions.
One of these uncertainties is whether claimants who had previously reached settlements with Equitas will attempt to reopen their cases now that it is backed by Berkshire's deeper pockets. Equitas executives say any such claims are "baseless", but Mr Buffett acknowledges that Berkshire may find future negotiations more difficult.
"Particularly in the early days of Equitas I think that people, in making settlements with them may have been prompted to some extent by the many questions that were raised about Equitas at that time. So they had some advantage in early negotiations that we will not have."
Presumably these are the types of calls Mr Buffett will be less eager to receive.
Buffett's $7bn Lloyd's lifeline *Berkshire Hathaway unit offers hope to thousands of Names *Equitas to be given additional cover £150m set aside for pay-outs; [LONDON 1ST EDITION]
ANDREA FELSTED and PETER THAL LARSEN. Financial Times. London (UK): Oct 21, 2006. pg. 1
Warren Buffett, the US investor, yesterday offered thousands of Names at Lloyd's of London the hope of avoiding future cash calls by striking a deal to take on the London insurance market's pre-1993 claims.
Mr Buffett said the 34,000 Names - individuals who supported Lloyd's - and their descendants should be reassured by the deal, which will see Berkshire Hathaway, his investment company, provide additional cover to Equitas, the company set up to manage their liabilities.
In a Financial Times interview, he said: "If I were a Name, I would feel that getting an additional $5.7bn of extra protection really ended things. As a Name, I would feel that the Equitasmanagement had put thismatter to bed by this kind of contract."
If approved, the deal will end one of Lloyd's unhappiest eras, when it almost collapsed under the weight of a number of disasters and an explosion in asbestos-related claims.
The losses fell on individual Names, many of whom were financially ruined. The crisis also prompted Lloyd's to launch a rescue plan which created Equitas.
Christopher Stockwell, chairman of the Lloyd's Names association, said: "It would appear that this is going to remove Names' ultimate liabilities and give them true finality."
Lloyd's said the deal would also "end the residual legal liabilities" faced by the market if Equitas were to fail.
Under the terms of the two-stage agreement, National Indemnity Company, a Berkshire division, will provide up to $7bn of additional reinsurance cover to Equitas. It will take over most of the assets of Equitas and receive £90m from Lloyd's.
Equitas will keep £150m, some of which will be distributed to Names.
If successful, Equitas will apply to the High Court to transfer all liabilities to Berkshire. The process, known as novation, ends any question of further claims falling on Names.
Hugh Stevenson, chairman of Equitas, said: "If, as we hope, a transfer of the liabilities from reinsured Names is achieved, they will no longer have anyliability whatsoever under policies reinsured by Equitas.
"They will have achieved finality and be able to sleep soundly knowing that this chapter is closed."
Mr Buffett said Equitas had made good progress in managing its liabilities and added that the deal would give Berkshire "the expectation but not the assurance of profit".
But he added that there were still many potential claims to be resolved.
"It will be long after I am dead before we know the final answers on how it all works out. But insurance - which we are doing here - involves the taking of risks.
"You think you can make a reasonable estimate as to a likelihood of profit, and sometimes you're right and sometimes you're wrong."
FOR BUFFETT INTERVIEW: go to http://uniset.ca/lloydata/news/ft_buffettinterview.html