Insurance Australia Group (IAG) has partnered with Warren Buffet’s investment behemoth, Berkshire Hathaway, which will see the US manager take a minor stake in the insurer via a $500 million placement.
The deal, announced today, will mean a 10-year strategic relationship, with a 20 per cent quota share arrangement across its consolidated insurance business and approximately 3.7 per cent investment in IAG by Berkshire Hathaway via a share placement.
Under the terms of the partnership, IAG will acquire Berkshire Hathaway’s local and personal SME business lines. In return, Berkshire Hathaway will acquire the renewal rights to IAG’s large corporate property and liability insurance business in Australia.
IAG chief executive and managing director Mike Wilkins said the company and shareholders will see long-term value from the partnership.
“Our relationship with Berkshire Hathaway will provide IAG with significant capital flexibility while enhancing our ability to deliver improved consistency of earnings,” Mr Wilkins said.
“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,” Mr Wilkins said.
IAG expects the quota share arrangement will result in a reduced capital requirement of approximately $700 million over the next five years, with around $400 million expected to be realised in FY16.
Berkshire Hathaway chairman and chief executive Warren Buffet 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,” Mr Buffet 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,” he said.