Buffett's Berkshire to buy A$500-mn stake in Insurance Australia Group

Warren Buffett's investment arm Berkshire Hathaway is buying an A$500-million stake in Insurance Australia Group (IAG).

Berkshire Hathaway will buy a 3.7-per cent stake in IAG, one of Australia's biggest companies, through a $500-million share placement at $5.57 per share, yesterday's closing price.

Berkshire Hathaway, which also has the option to buy up to another 5 per cent of IAG's issued capital within the next two years, has agreed not to increase its holding above 14.9 per cent.

Berkshire Hathaway will receive a 20-per cent share of IAG's gross written premium and pay 20-per cent of its claims for the next decade.

IAG has also agreed to buy Berkshire's local personal and small and medium enterprise insurance businesses, while Berkshire will buy the rights to IAG's large-corporate property and liability insurance business in Australia.

IAG chairman Brian Schwartz said, ''The Board is delighted to welcome Berkshire Hathaway as a strategic partner and shareholder. 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. We look forward to a long and mutually beneficial relationship.''

IAG managing director and CEO Mike Wilkins said IAG and its shareholders would see long-term value from the partnership which is expected to deliver significant benefits to both companies.

''Our relationship with Berkshire Hathaway will provide IAG with significant capital flexibility while enhancing our ability to deliver improved consistency of earnings. 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.

Warren Buffett, chairman and CEO of Berkshire Hathaway, 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. For us, they are a natural partner with a strong management team and brand presence.''

Berkshire Hathaway has investments across a wide range of industries including general insurance and reinsurance. It is one of the top 10 publicly-listed companies globally, with a market capitalisation of around $350 billion. It launched its specialty insurance business in Australia earlier this year.