Berkshire Hathaway, the massive conglomerate run by Warren Buffett, is buying a 3.7% stake in Insurance Australia Group (IAG) in a deal worth $388 million (A$500 million). Under the terms of the deal, Berkshire will have to pay 20% of the Australian firm’s insurance premiums and 20% of all claims for the next ten years.
Details on the Berkshire – IAG deal
Bloomberg reports that Berkshire’s stake in IAG comes from new shares.
Buffett has been working on expanding insurance coverage around the globe due to rising competition in the reinsurance industry. His firm owns Berkshire Hathaway Specialty, which Buffett hired four American International Group (AIG) executives to start about two years ago.
Bell Potter Securities analyst T.S. Lim told Bloomberg that the deal offers Buffett “significant long-term exposure to the Australian market at a reasonable risk.” For IAG, he said the deal is about expanding so that it can beat back smaller insurance providers.
Known as the Oracle of Omaha, Buffett said in a statement that their partnership with IAG fast-tracks their entry into Australia and the rest of the region. Berkshire intends to reinvest the capital it receives from the deal with IAG into other Australian firms, including banks, reported The Age. Buffett reportedly told the newspaper that he plans to purchase a stake in one or more Australian banks.
IAG’s plan for the Berkshire deal
Further, IAG said the deal with Berkshire enables it to free up some capital, up to A$700 million, over the next five years. The free capital will enable the Australian insurance provider to look for expansion opportunities in Malaysia, China and Thailand.
IAG also said it will use the extra cash from the deal with Berkshire Hathaway to cut down on its natural disaster exposure. The firm is one of the biggest buyers of reinsurance for catastrophes in the world, and it has had a reinsurance deal with Berkshire in place for about the last 15 years. IAG took a major hit in 2014 when a hail storm in Queensland caused losses of about A$1.35 billion across the industry.
As of this writing, Class A shares of Berkshire Hathaway were up 0.1% at $209,500. Shares of IAG climbed 4.3% during the regular trading day in Sydney, closing at A$5.81.