Billionaire Warren Buffett’s Berkshire Hathaway is buying a $500 million stake in Insurance Australia Group after the two companies entered into a 10-year partnership.
The partnership will see Berkshire Hathaway receive 20 per cent of IAG’s gross written premium and pay 20 per cent of its claims for the next decade.
IAG has also agreed to buy Berkshire’s local personal and small and medium enterprise insurance businesses while Berkshire will buy the rights to IAG’s large-corporate property and liability insurance business in Australia.
As part of the agreement, Berkshire will buy $500 million worth of IAG shares via a placement that will see it emerge with a 3.7 per cent stake in the company.
IAG also has the option to place up to another five per cent of its issued capital with Berkshire Hathaway within the next two years, though Berkshire has agreed not to increase its holding above 14.9 per cent.
The company’s shares jumped 31 cents, or more than five per cent, to $5.88 at the start of trading on Tuesday.
Mr Buffett said the IAG deal would provide a springboard into Asia for Berkshire’s extensive insurance operations.
IAG is heavily focused on expanding into Asia and has joint ventures and stakes in insurers in China, Vietnam, India, Malaysia, Thailand and Indonesia.
“Our strategic partnership with IAG will help fast-track our entry into this region, and provides us with opportunities to leverage IAG’s extensive capabilities while also making our expertise available to IAG,” Mr Buffett said in a statement.
Mr Buffett is one of the world’s richest people, with an estimated fortune of around $US68.6 billion ($A88.35 billion), virtually all of which is tied up in Berkshire Hathaway stock.
Since taking control of the then New England textile manufacturing company in 1964, Mr Buffett, now 84, has transformed Berkshire Hathaway into a $US355 billion ($A457.18 billion) behemoth with interests in everything from transport to energy to food staples.
But one of the keys to its success has been its insurance division, now among the largest in the world, which Mr Buffett has leveraged to make other investments and buy entire companies.
IAG chief executive Mike Wilkins said the partnership with Berkshire would reduce the volatility of the insurer’s earnings and free up money to pursue further growth opportunities.
“Our relationship with Berkshire Hathaway will provide IAG with significant capital flexibility while enhancing our ability to deliver improved consistency of earnings,” he said.
IAG says the partnership with Berkshire, plus further synergies from its purchase of Wesfarmers’ insurance operations will lift its insurance margin – the profit it makes on premiums – to between 14 and 16 per cent in the 2016 financial year.
The insurer also reaffirmed its 2014/15 guidance for in insurance margin of between 10.5 and 12.5 per cent, which has been weighed down by greater than expected insurance claims.
– AAP
