Finance History | Equitas — Berkshire Takes On Lloyd's Long Tail

At the Lloyd's Building at One Lime Street, the marketplace whose old liabilities had been concentrated in Equitas gained a new financial backstop on March 30, 2007, when National Indemnity Company's reinsurance agreement with Equitas became effective inside Berkshire Hathaway. Lloyd's had created Equitas in 1996 to handle claims from policies written before 1993, assigning it £11.1 billion, and Berkshire's 2006 shareholder letter reported that £11.3 billion of claims had already been paid by the time Warren Buffett and Ajit Jain evaluated the remaining exposure in 2006. The bargain exchanged US$7.12 billion in cash and securities for Berkshire's promise to pay Equitas's future claims and expenses up to US$13.9 billion, a cap that stood US$5.7 billion above Equitas's then-current estimate of its ultimate liabilities but did not make Berkshire's protection unlimited. The underlying risks included asbestos, environmental, and other long-tail claims whose final cost and payment timing could remain uncertain for decades, so the transaction depended as much on disciplined reserving and investment returns as on the headline premium. Berkshire's third-quarter 2007 filing recorded US$7.1 billion of retroactive-reinsurance premium when the contract took effect and established a US$2.2 billion deferred charge because the initial loss reserves exceeded the consideration received, leaving no immediate underwriting gain at inception. Economically, Berkshire received an enormous pool of investable float before it would have to satisfy many claims, while Equitas and the Lloyd's Names obtained a much wider margin against adverse development from a counterparty able to carry liabilities over a very long horizon. The finance-history lesson is that reinsurance can function as a capital-market transaction: legacy uncertainty moved from thousands of exposed participants into a capped contract backed by Berkshire's balance sheet, and the price reflected both risk transfer and the time value of the funds transferred with it. The cover photograph shows the Lloyd's Building, the operating marketplace associated with the Equitas liabilities rather than the 2007 closing itself; Tristan Surtel photographed it in 2018, and the image is reused under CC BY-SA 4.0 via Wikimedia Commons.