Buffett Takes Gamble With Equitas Deal
Berkshire bets on ability to absorb runoff facility; lifts cloud over Lloyd's market
The $7 billion reinsurance deal between Berkshire Hathaway's National Indemnity Company and Equitas was the best news for the Lloyd's market in quite some time. Though Lloyd's has taken giant steps to restructure its capital base, upgrade its internal management structure and streamline its operations, there's been a black cloud looming on the horizon.
The question was whether Equitas-Lloyd's pre-1993 runoff loss facility-would have enough money to cover the market's lingering asbestos and environmental liabilities. Such concerns were largely laid to rest once and for all with this agreement.
Meanwhile, thousands of individual Lloyd's "Name" investors can finally achieve a sense of closure, and new investors can pony up their money confident the market is free from old losses at last.
The deal was described on our Oct. 30 cover as a "rescue" of Lloyd's by Berkshire Hathaway Chief Executive Officer Warren Buffett. Equitas CEO Scott Moser summed it up best by observing: "Names wanted to sleep easy at night, and we think we've just bought them the world's best mattress."
Some say the added reinsurance cushion will encourage more investment in Lloyd's, but Wendy Baker, president of Lloyd's America, doesn't expect any short-term impact. At a press dinner shortly after the deal was announced, Ms. Baker noted that Lloyd's hasn't exactly had a hard time attracting capital lately-and that, in fact, some capital had been turned away in the quest to write coverage responsibly.
The arrangement with National Indemnity is not a done deal, with regulatory approval pending. However, one can sense that Lloyd's has already turned a corner, and is ready to focus more vigorously on the market's biggest challenges-modernizing its paper-intensive culture, while leveraging the cost savings technology could provide.
They certainly have the right person in place as CEO to accomplish this, as Richard Ward-who came aboard in late April-has an electronic background in the energy futures market. (For Mr. Ward's vision for Lloyd's, see NU's Dec. 11 cover story.)
Meanwhile, in a series of speeches across the country, top Lloyd's officials have been warning the industry of the dangers of allowing the softening market to get out of control. "Despite our current good fortune, I'm going to make a strong case today that we are still standing near the edge of the cliff," said Julian James, Lloyd's director of worldwide markets, at last month's annual meeting of the Property Casualty Insurers Association of America.
He said that if insurers do not focus on underwriting performance rather than write for market share, make terms and conditions as important as price, and stick with lines they know and can price properly, the industry will "drift back into the financial intensive care ward."
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