Faced with a huge book of volatile, long-tailed claims and the possibility of running out of money to pay them, Equitas has emerged with a deal that benefits everyone concerned, according to a company spokesperson.
Jon Nash, with Equitas in London, told National Underwriter that reports of the possibility that the Equitas-Berkshire Hathaway deal almost didn't happen because of a sentence in a British law are "exaggerated." He noted, "I think there was a period where there was a problem, and they set to work on the problem and it was resolved. We were always optimistic."
Equitas, he said, is a "complex setup." As well as its executive management, it also has trustees who own the shares of Equitas, like shareholders, "and their primary interest is the Reinsured Names–the individuals who sit behind us."
The principle of this, he explained, is that "in the old days, individuals were the providers of the capital and they were grouped together in syndicates–almost like mini insurance companies–referred to as Names."
Those 34,000 individuals, he said, "are the real stakeholders in Equitas. They tend to be elderly individuals, mostly located in the U.K. They're not the obvious kind of group of people to be the capital providers for a very long-tail book of business."
Berkshire Hathaway, however, "is exactly in that business." So the business, he said, "was switched, from those who wanted to be out of the risk-taking business to the best company in the world at handling big risks."
Mr. Nash pointed out that Equitas consists of "every non-life Lloyd's policy written" from 1992 and back to the early 1900s. He said asbestos makes up about 55 percent of the reserves, and APH reserves–asbestos pollution and health hazard–are about 80 percent of the total.
Very few, if any individuals were insured by Equitas. He said policies are held by corporations and the insurers of those corporations. "To give you examples, in the past we have announced settlements with Halliburton, Hartford and Travelers," he said.
The Berkshire Hathaway transaction, Mr. Nash said, will take place in two phases. This is because "we wanted to achieve real finality for those Named individuals." The reason, he explained, is that if Equitas fails, "there is a theoretical concept that policyholders can go after those 34,000 individuals to get their claims paid. So our goal was to finish the runoff and take any risk of that happening away from those Names."
The first phase "effectively gets the deal done," while the second phase is designed to "enable us to do what's often referred to as a transfer of liability. So we hope to go to the high court in the U.K. and get them to approve a transfer of liabilities that will clear any liability from the Names once and for all," Mr. Nash explained.
The "sweetener for the high courts to allow us to do that," he said, is an additional 1.3 billion pounds of cover from Berkshire purchased at that time. "It's obviously good for the Names to get rid of liability, but it should also be good for policyholders. If they don't object to this procedure, then they will have another 1.3 billion of cover for them to make sure their claims get paid," he said.
Because of its size, Berkshire "can clearly ride out the blitz in a way that Equitas was never able to, because it was a very thinly capitalized business," he said.
Although the deal is still in the works, if it had not happened, "I guess we would have traded on, and hopefully there would have been enough reserves to meet all the liabilities," he said.
Mr. Nash added that as of its last report on March 31, Equitas was a "solvent company. So all things being equal, it would have traded on and been okay." With the long-tailed volatile business that makes up Equitas, however, "things can turn against you and we weren't really in a position to ride too many negatives out."
He said that although there are three or four other companies in the world with the potential to do something like this, "we haven't heard from any of those."
"Berkshire approached us. They said they looked at this five or six year ago, but they contacted us in late June after the March report was published."
With this transaction, he said, "everyone comes out a winner. We see it being good for Names because they want out of these risks."
The transaction is good for Berkshire "on the basis of their expectation that they've got a reasonable chance of making a profit," he said. It's good for Lloyd's because Lloyd's Equitas "was often cited as a drag on their rating." The move also is good for Equitas because "it was set up to try and achieve finality, and we've hopefully done that with this transaction."
It's also good for policyholders, who before the deal was made were looking at "reserves of $8.7 billion, and once the deal happens, suddenly they will be looking at reserves to cover their claims of more than $14 billion."
Is there a chance the deal won't be completed?
"I think there must be some risk," Mr. Nash said, "because the deal hasn't gone through yet and there are still hurdles to go through and regulatory consents to get. But I think we're optimistic it will go through."
He added that Equitas' chief executive officer, Scott Moser, summed it up best. "The CEO said his phrase for this is that 'Names wanted to sleep easy at night, and we think we've just bought them the world's best mattress.'"
Playing 'Tough'
During a third-quarter report earnings conference call last week, ACE CEO Evan Greenberg, when asked about the Berkshire Hathaway deal, commented: "My sense of it [is] obviously they wouldn't buy a loss. In their judgment, I think they think it will run off with a positive return."
From ACE's perspective, he said, "we have an exposure to Equitas, and this protects counterparty credit quality to a far greater degree."
Mr. Greenberg added, "Equitas has always been a tough reinsurer, and I expect that Berkshire will run it off in a professional way."
When asked by NU about its reputation for being "tough," Jon Nash said of Equitas, "We've always characterized our approach and philosophy to be 'firm but fair' on claims issues. I don't think we'd be embarrassed to say we look very closely before we settle."
He added, "We've paid a lot of claims in the last 10 years, over 17 billion pounds. So it's not like we don't pay claims."
Doing the Math
Jon Nash explained the transaction between Equitas and Berkshire Hathaway:
"We had surplus assets–which we believe were over and above the liabilities we faced–of 458 million pounds, ($860.17 million).
"If you take 458 and take off the 172 million pounds ($323 million) that's being left with Equitas, you get 286 million pounds ($537.14 million). This is the surplus Equitas assets that Berkshire is getting straight away. On top of the 286 million pounds, they get 72 million pounds ($135.22 million) from Lloyd's.
"If you add the 286 and the 72, you get 358 million pounds ($672.36 million). That is the Phase I premium being paid to National Indemnity.
With Phase II, he added, there is an additional 40 million pounds ($75.12 million).
"So if Phase I and Phase II go through, [Berkshire] will receive 398 million pounds ($747.48 million)."
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