Berkshire Hathaway, with its $7 billion deal to take over Lloyd's Equitas operation, is gambling that the move will be profitable because it has extensive background in handling asbestos claims, according to a brokerage expert.

The move, which analysts greeted positively today, will see Equitas--Lloyd's runoff operation for asbestos and other long-term exposures--buying $7 billion in reinsurance from the Berkshire subsidiary National Indemnity Company, which will run its operations.

Besides providing the reinsurance for all Equitas' liabilities National Indemnity will take on the staff and operations of Equitas and conduct the run-off of Equitas' liabilities.

Paul Little, executive vice president and chief brokerage officer of Holborn Corporation, a reinsurance brokerage, said Berkshire has substantial background in the area of asbestos claims because it had purchased Johns Manville, a major manufacturer of asbestos products in 2001 before asbestos injury claims soared out of control.

"Berkshire has a lot of information about the asbestos world and environmental claims. They can leverage that. They're betting they can settle claims more efficiently than what Equitas is able to do," Mr. Little explained.

This is good news for Holborn clients that trade with Lloyd's, he said, because while the market has always claimed that Equitas "ring fenced" Lloyd's exposures, "there's always been some doubts about the quality of security." The move, he added, will likely attract new capital to Lloyd's.

Don Thorpe, senior insurance analyst for Fitch Ratings, which put Lloyd's on 'A' ratings Watch Positive as a result of the deal, agreed that in addition to a strong knowledge of asbestos through Johns Manville, Berkshire has done similar transactions with insurance units.

He noted they had written coverage for a Cigna subsidiary with long term obligations that was purchased by Ace in 1999 and they recently bought Swiss reinsurer Converium's U.S. Operation which was in runoff with a lot of longtailed business.

The deal takes the [Equitas claims] overhang away from Lloyd's head, said Mr. Thorpe.

Fitch noted that the Berkshire-Equitas deal establishes a vehicle to reinsure and run-off the 1992 and prior-years' liabilities of Lloyd's members.

Berkshire will reinsure all of Equitas' liabilities and provide up to $7 billion in reinsurance protection above Equitas' undiscounted reserves, which stood at $8.7 billion in the first quarter of this year.

The companies said the transaction will occur over two phases. In phase one, Berkshire will provide $5.7 billion in reinsurance protection to Equitas and take on the staff, operations and management of the run-off of Equitas. Phase two will result in the transfer of Lloyd's members' pre-1993 liabilities into Equitas or a UK-based subsidiary of Berkshire and the provision of additional reinsurance protection of up to $1.3 billion.

Lloyd's will make a contribution of $169 million towards the premium paid to Berkshire for the reinsurance protection under phase one and phase two of the transaction.

The transaction is subject to various regulatory and legal approvals.

Standard & Poor's Ratings Services said today it revised to positive from stable the outlook on the U.K.-based Lloyd's insurance market and on The Society of Lloyd's. At the same time, the 'A' insurer financial strength ratings on Lloyd's were affirmed, as well as the 'A' counterparty credit rating on The Society of Lloyd's.

Based upon what has been disclosed to-date, the Equitas deal "may remove any realistic potential for reserve inadequacy at Equitas Ltd. to undermine confidence in Lloyd's--in particular, amongst clients, brokers, and capital providers," said Standard & Poor's credit analyst Marcus Rivaldi.

"Any move that has the potential to strengthen the view of Lloyd's security is a positive and the fact the two major insurance entities in the U.S. and London are working together to find a solution has to be a boost for the industry," said Bill Adamson, chief executive officer of US operations for Carvill, the specialty reinsurance intermediary.

Special Reports /

Berkshire Has Know-How For Equitas Deal: Expert

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