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Berkshire Hathaway in deal to assume, runoff Equitas liabilities


LONDON—Berkshire Hathaway Inc. has proposed a multi-billion dollar deal to reinsure and runoff the liabilities of Equitas Ltd., which would mark an end to the long-tail liability of individuals reinsured by Equitas and eliminate any potential exposure of Lloyd's of London to the runoff vehicle.

Under the arrangement, announced Friday, the liabilities of Equitas Ltd., the runoff reinsurer for the pre-1993 longtail liabilities of Lloyd's of London syndicates, will be transferred to Berkshire Hathaway unit National Indemnity Co.

If the deal receives U.K. regulatory approval, National Indemnity will reinsure all of Equitas' liabilities, provide up to $7 billion (8.82 billion euros) of reinsurance coverage to Equitas, and assume current staff and operations of Equitas to conduct the runoff of its liabilities.

In the first phase of the program, National Indemnity will provide reinsurance cover of $5.7 billion (7.18 billion euros) to Equitas above the runoff reinsurer's reserves of $8.7 billion (10.96 billion euros) as of March 31, 2006, with an adjustment for payment and recoveries since that date.

Equitas will transfer to National Indemnity its assets, less £172 million (256.7 million euros) for miscellaneous expenses, and Lloyd's will pay £72 million (107.3 million euros).

Under the second phase of the deal, Equitas will seek approval of the U.K. High Court to transfer all liabilities of reinsured individual investors—known as names—into Equitas or a subsidiary of Berkshire Hathaway. Currently, names are reinsured by Equitas but they retain liability, explained Scott Moser, chief executive officer of Equitas.

If such a transfer occurs before the end of 2009, National Indemnity will provide up to $1.3 billion (1.64 billion euros) of additional reinsurance cover for a further premium of up to £40 million (59.6 million euros). At the time of any such transfer, or if a transfer has not occurred by the end of 2009, Lloyd's will pay a further £18 million (26.8 million euros).

Hugh Stevenson, chairman of Equitas, explained that on completion of phase one of the deal, a small return premium will be paid to names. While the deal does not require approval from names, it does need approval from the trustees of Equitas, and a series of meetings will be held between now and March next year, he said.

The Financial Services Authority, which regulates insurance in the United Kingdom, also must approve the transaction before March if it is to proceed.

Mr. Moser said he believed the deal represented a "win" for all parties involved, and validated Equitas' strategy of striking settlement deals and commutations in order to shrink its liabilities.

In a statement, Warren Buffet, chairman of Berkshire Hathaway, said that when Equitas was launched "skeptics were many and vocal."

But he said the management of the runoff enabled the proposed deal to be struck.

"Much, however, remains to be done," he said. "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," he added.

In the wake of the announcement, Standard & Poor's Corp. revised it's A rating of Lloyd's to Positive from stable, and said that the deal likely would "remove any realistic potential for reserve inadequacy at Equitas Ltd. to undermine confidence in Lloyd's."

Lloyd's, which would make a total contribution of about £90 million (134.1 million euros) to National Indemnity as part of the transaction, described the deal as "a significant milestone" that will "close a chapter" in its history.