By Robb M. Stewart
MELBOURNE, Australia--Billionaire investor Warren Buffett
doubled down his bet on Asia's insurance market by buying a stake
in one of Australia's largest general insurers, in a move that
looks set to support the expansion of his own firm's presence in
the region.
Berkshire Hathaway Inc. will initially buy 3.7% of Insurance
Australia Group Ltd. for 500 million Australian dollars (US$388
million) as part of a 10-year partnership, the Australian company
said Tuesday.
The deal gives Mr. Buffett a firmer foothold in Australia's
A$11.5 billion general-insurance market while allowing the
financier, whose long-term investing success has made him a legend
on Wall Street, to leverage Insurance Australia's ambitions to
expand in Asia.
"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. Buffett
said of Insurance Australia in a statement.
Berkshire Hathaway is among a number of global firms scrambling
to tap Asia's potential for growth in the region's underserved
insurance market. Maurice "Hank" Greenberg, a former chief
executive officer of American International Group Inc., is also
striking deals in the region through his Starr Cos. vehicle, which
last year completed the first foreign buyout in China of a
state-backed general insurer.
Berkshire Hathaway, which has long been a significant force in
U.S. insurance, already has a presence in Asia through Gen Re, its
reinsurance unit, which played a role after large-scale flooding in
Thailand during 2011, when claims ran into billions of dollars. A
more recently launched specialty insurance arm began operating in
Hong Kong in January, and in April secured an insurance license to
operate in Sydney, where it appointed a former Insurance Australia
executive, Frank Costigan, as chief financial and chief operating
officer of the local unit.
According to Dealogic, this isn't Berkshire Hathaway's first
acquisition in Australia. About three years ago, the conglomerate
bought two small companies in the construction sector as well as
some oil-and-gas assets. It is, however, Berkshire's Hathaway's
largest acquisition by value in the Asia-Pacific region since it
bought a controlling stake in Japanese toolmaker Tungaloy Corp. for
about US$650 million in 2008, Dealogic said.
"The Asian insurance market has been a big draw for overseas
companies given the low penetration of insurance when compared to
Western markets and the economic growth in the region," said Sally
Yim, a senior credit officer for the Asia-Pacific region at Moody's
Investors Service. The deal with Insurance Australia helps Mr.
Buffett's firm overcome barriers to entering markets in both
Australia and New Zealand, she added.
Insurance Australia said the deal would help reduce volatility
in its own earnings and assist with its capital needs. Berkshire
Hathaway will buy about 89.8 million new Insurance Australia shares
at A$5.57 each, with an option to buy a further 5% of its expanded
share base within 24 months. The U.S. conglomerate has agreed not
to exceed a 14.9% stake for the initial 10-year period of the
agreement.
Berkshire Hathaway will receive 20% of Insurance Australia's
gross written premiums, and pay 20% of its claims. It will also
reimburse the Australian company for its share of operating costs,
and pay a percentage-based fee to access its franchise.
Berkshire Hathaway, which already provides reinsurance cover to
Insurance Australia, additionally will sell its local small- and
medium-business lines, and personal insurance operations, in
exchange for renewal rights to the Australian firm's large
corporate property-and-liability-insurance business.
"We believe the partnership is an endorsement of our strategy,
the strong franchises we have created in the Asia-Pacific region
and an acknowledgment of the complementary capabilities we can
bring for our customers," said Brian Schwartz, chairman of
Insurance Australia, which is one of the world's largest purchasers
of catastrophe reinsurance cover.
Mr. Buffett said the arrangement would fast-track Berkshire's
entry into the region, in a statement that drove Insurance
Australia's shares up by as much as 6.1% in Sydney, paring the
year's losses.
Insurance Australia's core businesses are in Australia and New
Zealand, where it competes with the likes of QBE Insurance Group
Ltd. and Suncorp Group Ltd. But the company has said it has its
sights on Asia. Recently, it obtained an insurance license in
Indonesia. Insurance Australia Managing Director and Chief
Executive Mike Wilkins said it was now exploring opportunities to
join China's nationwide insurance market.
Mr. Wilkins said Tuesday that Insurance Australia was also
looking to boost its stake in SBI General, a general-insurance
joint venture with State Bank of India, to 49% from 24% before the
end of the year, and that it is eager to grow in Thailand and
expand a Malaysian joint venture. Berkshire has been pursuing its
own expansion in Asia by poaching top executives from rivals,
including two senior officers from American International Group's
Asian operations.
Write to Robb M. Stewart at robb.stewart@wsj.com
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