Published Saturday  |  May 5, 2007

Berkshire's ties to Lloyd's grow


Berkshire Hathaway Inc.'s oldest international connection is with British insurance market Lloyd's of London.

Those dealings go back 40 years to 1967, when Berkshire acquired Omaha's National Indemnity Co., a longtime user of Lloyd's to back claims from taxicab insurance.

Since 2000, Berkshire, led by its chairman and chief executive, Warren Buffett, has invested tens of millions of dollars in Lloyd's operations.

But last year, Buffett signed his biggest deal yet with Lloyd's, becoming a major player in the world's oldest system of managing risk.

The deal promises profits for Berkshire and, in the process, scattered a looming financial storm that had threatened investors who put their personal finances at stake to cover potential property losses through Lloyd's, which was founded in 1688.

Lloyd's 27,972 investors, known as names, got into trouble starting in the 1980s as policies the company had issued decades earlier began generating huge claims for asbestos-related illnesses, product liability, environmental damage and other problems.

Nobody knew how big the claims would be, but they would total at least tens of billions of dollars, Buffett said in his 2006 letter to shareholders.

In 1996, in an effort to control the disaster, Lloyd's put more than $15 billion into a new company, Equitas, and made it responsible for claims on policies written before 1993. It wasn't enough, and when the money was used up, the individual "names" would have to pay out of their own pockets.

Some declared bankruptcy; others even committed suicide.

Last spring, after Equitas had paid off many of the claims, Buffett and Berkshire insurance chief Ajit Jain decided that Equitas would survive and that Berkshire could play a profitable role in the matter.

Today those Lloyd's names can sleep soundly at night, Buffett said.

Under terms of the deal, Equitas gave Berkshire $7.12 billion in cash. In return, Berkshire guaranteed future claims up to $13.9 billion - about $5.7 billion more than Equitas had estimated the claims would total.

Buffett said the $13.9 billion is "almost certainly sufficient" to pay all the claims. While it pays claims over the next several decades, Berkshire will invest the $7.12 billion now.

But the deal didn't rescue all the Lloyd's names.

Before the Berkshire transaction, about 900 of them were required to sign agreements that altered their relationships with Lloyd's. Those "hardship names" remain indebted.

John Atkinson, a Lloyd's name who lives on the Isle of Man, said he and the other hardship names had no choice but to agree to the offers from Lloyd's, which imposed claims on their property.

In an e-mail exchange, Atkinson said he is "now chained to Lloyd's not only for life, but for 20 years after my death" because his estate also will be responsible for the debt.

Since the Berkshire deal, he has heard that hardship names may receive a payment, possibly as much as $1,000 each. Even so, he has applied for financial help from a London charity that administers a Lloyd's support fund.

But the vast majority of the people involved benefit from Berkshire's plan. And Berkshire's success in the transaction will depend on the size of the claims it will pay and the returns it gets from investing the cash it received from Lloyd's.

Some of the claims will be for medical treatments for people who are young today. Buffett said the last claim may not be paid for 50 years or longer.

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