Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


Buffett's Berkshire Hathaway buys 3.7% of IAG

Buffett's Berkshire Hathaway buys 3.7% of IAG

By Jonathan Underhill

June 16 (BusinessDesk) - Berkshire Hathaway, Warren Buffett's investment vehicle, has acquired 3.7 percent of Insurance Australia Group in an A$500 million placement as part of an agreement that will see the US firm take 20 percent of IAG's premiums and pay 20 percent of the insurer's claims.

The deal marks Buffett's first investment in an Australian company although Berkshire's reinsurance relationship with IAG, the biggest insurer in Australia and New Zealand, dates back to 2000. Berkshire will buy 89.8 million new shares at A$5.57, based on IAG's closing price on Monday.

"Very recently we decided to cast aside the commercial relationship and form an enduring partnership," Buffett said in a video statement. IAG "is a terrifically strong company, and Berkshire Hathaway has some strengths we believe."

"I'm 84 years old, this is my first investment in an Australian company," Buffett said. "I've been very derelict but it has been worth waiting for."

IAG chief executive Mike Wilkins and chief financial officer Nick Hawkins were quizzed on an analyst call about whether Buffett had effectively gained 20 percent of IAG for 3.7 percent of the capital. The company said that wasn't the case because the deal includes Berkshire Hathaway reimbursing a share of IAG's operating costs and paying "a percentage-based fee which recognises the value of accessing IAG's strong core franchise."

That fee was "a key element" to a projected 200 basis point improvement in IAG's reported insurance margin, Hawkins said. "It is 3 percent of our equity plus a fairly sizable fee exchange commission."

The company didn't release details of the fee, preferring to give guidance instead, which for 2015 is for gross written premium growth (GWP) at the lower end of the 17 percent to 20 percent it gave in February and for reported insurance margin of 10.5 percent to 12.5 percent. For 2016, GWP growth is forecast at zero to 3 percent, with an insurance margin of 14 percent to 16 percent.

Under the agreement, IAG has an option to place up to a further 5 percent of its shares to Berkshire within 24 months and the US firm can move up to a maximum 14.9 percent stake. It must at least maintain its initial stake for the term of the quota agreement.

Wilkins said the deal reduces IAG's capital requirements by about A$700 million through 2020, including about A$400 million in 2016. It also reduces IAG's catastrophe requirement.

"This reduces volatility in future earnings and gives us significant scope to pursue growth and consider capital management," Wilkins said.

IAG businesses underwrite more than A$11 billion of premiums a year through brands including NRMA Insurance, CGU and Swann in Australia, NZI State, AMI and Lumley Insurance in New Zealand, and various brands in its target Asian markets of India, Malaysia, China, Vietnam and Indonesia.

IAG said Berkshire's investment would have "a modest dilutionary effect in the short-term" but would provide capital and operational benefits longer term.

IAG shares rose 4.1 percent to $5.80 and have declined 7.4 percent this year.


© Scoop Media

Business Headlines | Sci-Tech Headlines


Consumer NZ: Buy-now, Pay-later Raking In $10m+ In Late Fees Annually

A Consumer NZ survey has found buy-now, pay-later services are costing shoppers more than $10 million a year in late fees. Close to four out of 10 Kiwi consumers use buy-now, pay-later services, such as Afterpay, Laybuy and Zip... More>>

Westpac: Catherine Mcgrath Appointed New Zealand CEO

Westpac Group CEO Peter King and the Westpac New Zealand Board today announced the appointment of Catherine McGrath as Chief Executive Officer, Westpac New Zealand... More>>

Amazon: AWS To Open Data Centres In New Zealand

Today, Amazon Web Services (AWS), announced plans to open an infrastructure region in Aotearoa New Zealand in 2024. The new AWS Asia Pacific (Auckland) Region will consist of three Availability Zones (AZs) and join the existing 81 Availability Zones across 25 geographic AWS Regions at launch... More>>


Statistics: Surge In Imports Results In Record Monthly Trade Deficit
Imports increased $1.8 billion in August 2021 compared with August 2020, resulting in a record monthly trade deficit of $2.1 billion, Stats NZ said today. Exports were little changed, down $42 million. "This is a larger deficit than normal because of higher values for imports.. More>>

Fonterra: Completes reset, announces annual results and long-term growth plan out to 2030

Fonterra Co-operative Group Limited today announced a strong set of results for the 2021 financial year, reflected in a final Farmgate Milk Price of $7.54, normalised earnings per share of 34 cents and a final dividend of 15 cents... More>>

Statistics: GDP rises in the June 2021 quarter

Gross domestic product (GDP) rose by 2.8 percent in the June 2021 quarter, following a 1.4 percent increase in the March 2021 quarter, Stats NZ said today. June 2021 quarter GDP was 4.3 percent higher when compared with the December 2019 quarter... More>>