By Robb M. Stewart
MELBOURNE, Australia--One of Australia's largest insurers has
struck a strategic partnership with Warren Buffett's Berkshire
Hathaway Inc., selling a 3.7% stake for 500 million Australian
dollars (US$388 million) to the well-known investor.
Insurance Australia Group Ltd. said Tuesday it had agreed a
10-year arrangement with Berkshire that it expected would reduce
volatility in its earnings and its capital requirements.
For Berkshire, it fast-tracks entry into the region via a
company it has worked with for the past 15 years, Mr. Buffet said
in a statement.
"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," IAG Chairman Brian Schwartz said.
Under the terms of the deal, Berkshire will receive 20% of IAG's
gross written premiums and pay 20% of the insurer's claims, the
insurer said. Berkshire will also reimburse IAG for its share of
operating costs and pay a percentage-based fee to access the
Australian company's franchise.
IAG, one of the world's largest purchasers of catastrophe
reinsurance cover, said the quota share arrangement will reduce its
exposure to the geographic concentration of insurance risk in
Australia and New Zealand and lower future catastrophe reinsurance
needs. It expects the pact will reduced capital requirement by
about A$700 million over the next five years.
Berkshire, which will buy about 89.8 million new IAG shares at
A$5.57 each, has an option to buy a further 5% of IAG's expended
share base within 24 months, but has agreed not to exceed a 14.9%
stake for the period of the agreement, the companies said.
IAG in late April warned that claims relating to storms that
struck eastern Australia would sharply lift its costs for the
financial year and weigh on its insurance margin. It lifted its
assumption for natural-disaster-claim costs to A$1 billion for the
year, including its reinsurance coverage, from an earlier
assumption of A$700 million.
News of the agreement with Berkshire helped buoy IAG shares,
lifting them almost 4% to give the company a market capitalization
of almost A$13.6 billion.
Mr. Buffett said the quality and strength of IAG's business were
pivotal to Berkshire's decision to enter the relationship.
IAG in a presentation said its priorities won't change following
the investment, and that it would continue to pursue opportunities
to grow outside its core operations in Australia and New Zealand
into Asia, particularly in India, Thailand, Malaysia, China,
Vietnam and Indonesia.
In India, IAG said it is seeking to increase its stake in SBI
General, the general-insurance joint venture with State Bank of
India, to 49% from 24% before the end of 2015.
The company also recently acquired an insurance licence in
Indonesia, and Mr. Wilkins said IAG is investigating further
opportunities to join China's insurance market on a national
scale.
Write to Robb M. Stewart at robb.stewart@wsj.com
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