Breaking Down Berkshire's Equitas Deal

Excerpts.....

In October 2006, National Indemnity, a unit of Berkshire Hathaway signed a landmark deal to assume the assets, liabilities, and operations of Equitas, formed by Lloyds of London to assume its liabilities on policies written prior to 1992. As part of the deal, Berkshire agreed to provide Equitas as much as $7 billion in reinsurance coverage.

Figuring out how Berkshire makes money on these types of deals could help Fools understand Berkshire's insurance business better -- and gain insight into Buffett's and Berkshire reinsurance chief Ajit Jain's methods.

Lee: Why do you think Berkshire was able to get this deal done, versus other finite reinsurers, like AIG, out there?

Mayerson: Berkshire is somewhat unique, in that its shareholders have such large stakes (given the price per share) and have been inculcated by Warren Buffett to take the long-term view.

In contrast, other companies' shareholders or fund managers seem more focused on the shorter or medium term. As a result, Berkshire can do a deal today that it hopes will pay off for it two decades from now. Most other companies have neither the management nor the shareholders who are willing to reap the financial benefits two decades hence.