Warren Buffett’s firm invests $500 million in Insurance Australia Group

HE’S the world’s most famous investor, and the Oracle of Omaha has finally arrived down under with a bang. Warren Buffett isn’t messing around.

WARREN Buffett’s company is investing $500 million in Insurance Australia Group and taking on 20 per cent of that company’s new business.

Berkshire Hathaway Inc. will acquire 3.7 per cent of the Australian firm also known as IAG as part of the deal announced Monday. Berkshire will also receive 20 per cent of the revenue and pay 20 per cent of the claims over the next decade.

Berkshire had been providing reinsurance to IAG since 2000, so it was already familiar with the company. IAG owns Australian brands including NRMA Insurance, SGIO, SGIC and CGU Insurance.

“For us, they are a natural partner with a strong management team and brand presence,” Buffett said in a statement. “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.”

The deal will strengthen Insurance Australia Group’s balance sheet just as it expands its insurance operations in India and works to establish itself in Indonesia after a recent acquisition. It is also trying to increase business in China, Thailand, Malaysia and Vietnam.

IAG said it will benefit from Berkshire’s $500 million investment and from a $700 million reduction in its capital requirements because Berkshire is taking on 20 per cent of its insurance claims.

Investor Andy Kilpatrick, who wrote “Of Permanent Value: The Story of Warren Buffett,” said both companies should benefit.

“It seems like an excellent deal,” Kilpatrick said.

Berkshire Hathaway owns an eclectic assortment of more than 70 businesses that includes major electric utilities, BNSF railroad, retail jewellers and furniture stores but insurance remains a key part of the conglomerate.

“Despite the fact that we’re in a great many businesses, our first-time love, our long-time love, our future love has always been the insurance business,” Buffett said.

For Berkshire, the deal may help it find a new acquisition by further raising its profile overseas, and it will help the new Berkshire Hathaway Specialty Insurance office that opened in Australia this spring grow.

The deal will also add to Berkshire’s already sizeable insurance float of $83.5 billion. Buffett invests that float money generated by its insurance companies — that include General Reinsurance, Geico and National Indemnity — between when customers buy policies and when claims are filed.

Berkshire agreed to hold the 89.8 million IAG shares it is acquiring for at least the next 10 years and acquire no more than 15 per cent of the company in that time.