A Hitch in British Law Nearly Thwarted Buffett’s Deal With Lloyd’s
A short passage in a voluminous British law nearly scuttled the deal with Warren E. Buffett last week that lifted the shadow of billions of dollars in asbestos and other claims that had hung over Lloyd’s of London for nearly two decades.
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Seth Wenig/Associated Press
Warren E. Buffett helped lift the shadow of billions of dollars in asbestos and other claims that had hung over Lloyd’s of London.
Berkshire Hathaway, would pay up to $5.7 billion in claims over the next three years. Next, the negotiators said, they hope to get an additional $1.3 billion in backing from Mr. Buffett and a formal declaration from a British judge that the lingering financial threat has finally been removed.
Mr. Buffett said in an interview yesterday, that he had not been directly involved in the negotiations and had not been aware that the British had considered withdrawing. But he said he did not doubt the accuracy of the British account.
Mr. Buffett said that while he stayed in close touch with Ajit Jain, his main representative in the talks, “We didn’t know that much about what was going on on their side.”
“Like anybody in negotiations,” Mr. Buffett said, “they don’t necessarily put all their cards on the table face up. But they behaved very honorably.”
Mr. Jain, who heads the reinsurance division of Berkshire’s National Indemnity Company, has collaborated with Mr. Buffett on many big high-risk deals. Mr. Buffett said Mr. Jain was traveling in Germany yesterday.
Berkshire Hathaway is one of the most highly rated companies, reporting more than $40 billion in cash at the end of June. Its main stock, which has never been split, closed yesterday at $100,600, up $600 from the previous day when it closed for the first time at $100,000. Analysts expect the company to have record earnings this year.
Lloyd’s was nearly destroyed by an avalanche of claims on polices for asbestos, major storms and oil spills in the late 1980’s and early 1990’s. The investors, known as Names, had pledged their entire net worth to back policies sold by Lloyd’s. Over the years, they had often earned huge profits. But with all the claims, their investments became a nightmare.
To stem the damage, Lloyd’s set up a separate company in 1996, Equitas, with the sole mission of paying the crippling claims and giving Lloyd’s a fresh start. From the beginning, however, financial experts and Lloyd’s itself worried that Equitas would run out of money.
In the end, the five trustees of Equitas decided in August to set aside the restrictive clause in the huge Financial Services and Markets Act of 2000 and, as one of them put it privately, accept “commercial finality, rather than legal finality.”
Michael Deeny, one of the trustees and the chairman of the Association of Lloyd’s Members, said in an interview, “The transaction really removes any possibility of Equitas running out of money.”
Financial rating agencies said immediately after the deal was announced last Friday that they were considering upgrading their ratings for Lloyd’s.
Before Berkshire expressed interest in Equitas in June, executives at Equitas had discussed with London financial officials rewriting a phrase in the 2000 law that excluded a majority of Lloyd’s Names from formal protection in a transfer of financial liabilities. The continuing uncertainty briefly threatened the Berkshire deal, Scott P. Moser, an American insurance expert who served as the chief British negotiator, said in an interview on Monday.
When the problem with the British law came up, the negotiations were already roughly in the $7 billion range. Mr. Buffett was only required to start paying claims after all of Equitas’ nearly $9 billion in assets were exhausted. That gave Equitas a cushion of nearly $16 billion.
In early September, Mr. Moser, who is also the chief executive of Equitas, flew to the United States with the approval of the trustees of Equitas and met with Mr. Jain.
In the interview, Mr. Moser said he did not bring up the legal glitch, but proposed doing the deal in two parts. “They said it didn’t present a problem on their end,” Mr. Moser said.
A month after Mr. Moser’s meeting with Mr. Jain in the United States, both sides agreed to a deal and lawyers finished up the details last week.
Mr. Buffett could end up making a big profit. But as the deal was drawing to a close, he recalled yesterday, Mr. Jain asked him, “Are you willing to lose a lot of money?”
Mr. Buffett did not hesitate. “Yes,” he said.
Source: www.1stwebnews.com
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