Dear Friend,
Typical! Just as I hit the send button on last week’s email, the biggest news story of the year came flying across the wires — the Berkshire Hathaway-Equitas-Lloyd’s deal.
I expect you’re a bit tired of all the analysis of the transaction(s) by now — but it’s obviously fabulous news for Lloyd’s, Lloyd’s vehicles, older names and any potential new names or institutional players, who were worried about investing previously.
And presumably Ajit Jain of National Indemnity thinks it is a pretty good deal too!
The funny thing about this one is that some of us have been talking about it for so long, we thought it would never happen.
So when it eventually came through it ended up taking us by surprise!
Three and-a-half years ago I was the managing editor at The Fleet Street Letter, the UK’s longest-running investment newsletter. One morning I got a call from one of our regular contributors, Robert Miller. I always took Robert’s calls because his investment ideas had done consistently well for our readers.
At the time the newsletter had made 100%+ gains buy recommending readers buy a number of London-quoted Lloyd’s vehicles through the exceptionally hard market of 2002, so I was all ears for the next money-doubling tip to put before the investment team.
But the idea he pitched me, whilst being ahead of its time, was something our readers had no way of making money out of, so I politely declined. Undaunted, Robert got the article published in Reinsurance Magazine instead.
If you are a subscriber you can read the full text of that article here:
And if not — here are some of the juicy bits:
“One intriguing possibility is that Berkshire might make a bid for Equitas, the company running off old Lloyd's liabilities. This is not as fanciful as it appears. In 2000 Berkshire made what could be seen as a trial run at such a takeover when it reinsured all of CGNU's old-year London market liabilities as the latter had decided to concentrate on life assurance“.
And what was in it for Berkshire Hathaway back then?
Here’s what Robert thought was the reason why:
“A mutually attractive deal might have the following characteristics:
The reinsured Names would receive reinsurance with a limit of, for example, £1.2bn (compared with the surplus of £700m) underwritten by one of the strongest reinsurance companies in the world. In exchange, Berkshire would have Equitas's bond market portfolio, which it could use in whole or in part to make the acquisitions of high-quality businesses that are such a feature of Berkshire's annual reports. Berkshire would also be able to obtain a higher return than Equitas's large bond market portfolio.
Berkshire is perhaps one of only two or three reinsurers that have the combination of size and balance-sheet strength to contemplate such a deal”.
Fast forward to today and the names have eventually done much better than what Robert envisaged.
Do remember where you read all about such things first!