Equitas, the rescue vehicle set up 10 years ago to save the Lloyd's of London insurance market from collapse, was acquired yesterday by Berkshire Hathaway, the investment company of the billionaire investor Warren Buffett.
Under the deal, which will produce a dividend payment for 30,000 Lloyd's names, Berkshire is to take on Equitas's staff, its ongoing operations, almost its entire assets and all of its liabilities. It will also provide up to a further $7bn (£3.73bn) of reinsurance cover to boost the vehicle's finances.
Peter Levene, the chairman of Lloyd's, which will pay Berkshire £90m as part of the deal, said: "This agreement marks a significant milestone for Lloyd's that enables us to close a chapter in our history and move forward."
For Mr Buffett, the deal is a gamble that Hathaway will be able to manage profitably the run-off of Equitas's potentially huge claims book.
He said: "Putting Berkshire Hathaway's Gibraltar-like strength behind the remaining problems, which will take many decades to resolve, eliminates any worries for all concerned."
Equitas was set up in 1996 as part of a deal to prevent the Lloyd's market collapsing following huge losses on claims related to asbestos and natural disasters. Lloyd's names, the individuals who had previously underwritten insurance issued by the market and faced financial ruin as it teetered on the point of collapse, each agreed to pay tens or hundreds of thousands of pounds to transfer their liabilities to the new vehicle. Equitas subsequently agreed to reinsure all non-life policies issued by Lloyd's prior to 1993.
Equitas has since paid out £17bn in claims on such policies but has been dogged by suggestions it could eventually run out of money. The reinsurer has stressed it has sufficient reserves to meet all potential claims, but the doubts about its financial strength have undermined confidence in Lloyd's itself.
"Despite the outstanding performance of Equitas since its inception, the rating agencies sometimes cite it as having a potentially negative impact on the market's ongoing financial strength," said Richard Ward, the chief executive of Lloyd's. "The successful completion of this transaction should end that once and for all."
The credit ratings agency Standard & Poor's has already upgraded its view on Lloyd's itself to "positive" from "stable", following the announcement of the deal.
The agreement will also provide reassurance to the 30,000 or so Lloyd's names who remain legally liable for claims made on the policies they originally underwrote and have been depending on the reinsurance provided by Equitas. These names are now in line for a small refund of the £11bn of premiums they paid to set up Equitas.
Once the first part of the deal is completed, Equitas's remaining assets - likely to be worth between £100m and £150m - will be transferred back to the names, in proportion to the premiums they originally paid.Reuse content