16 June 2015 Insurance

Berkshire Hathaway buys $387m stake in IAG

Berkshire Hathaway has acquired a 3.7 percent stake in Insurance Australia Group (IAG) for A$500 million ($387 million) as part of a partnership between the two companies.

Berkshire Hathaway will take a 20 percent quota share of IAG’s consolidated insurance business over the next ten years, meaning that it will receive 20 percent of IAG’s consolidated gross written premiums and pay 20 percent of claims.

The Australian insurer expects the quota share arrangement to result in a reduced capital requirement of approximately $700 million over the next five years, with around $400 million of that benefit expected to be realised in 2016.

IAG will acquire Berkshire Hathaway’s local personal and SME business lines, while Warren Buffett’s company will also acquire the renewal rights to IAG’s large-corporate property and liability insurance business in Australia.

The partnership is expected to enhance IAG’s ability to deliver a through-the-cycle 15 percent return on equity.

Buffett, chairman and chief executive officer (CEO) of Berkshire Hathaway, said the quality and strength of the IAG business were pivotal to his company’s decision to enter the relationship.

“We have worked with IAG for more than 15 years and over that time we’ve developed a good understanding and respect for their people, what they offer and the way they do business. For us, they are a natural partner with a strong management team and brand presence,” he said.

“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.”

Brian Schwartz, IAG chairman, added: “The board is delighted to welcome Berkshire Hathaway as a strategic partner and shareholder. We believe the partnership is an endorsement of our strategy, the strong franchises we have created in the Asia Pacific region, and an acknowledgement of the complementary capabilities we can bring for our customers. We look forward to a long and mutually beneficial relationship.”

Mike Wilkins, IAG managing director and CEO, added that IAG’s shareholders would see long-term value from the partnership which is expected to deliver significant benefits to both companies.

“Our relationship with Berkshire Hathaway will provide IAG with significant capital flexibility while enhancing our ability to deliver improved consistency of earnings. It also further enhances IAG’s personal and SME insurance proposition and, importantly, it provides a springboard for future business innovation and development for both companies.

“We look forward to the benefits that will flow from the combination of IAG’s underwriting skills, supply chain management expertise and deep customer knowledge, coupled with Berkshire Hathaway’s specialty insurance expertise,” he said.

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