IAG ends strategic relationship with Berkshire Hathaway, extends profit-loss quota sharing
Berkshire Hathaway can now offload its IAG stake but both companies have extended their profit-loss sharing deal.
Berkshire Hathaway, the giant US insurer controlled by Warren Buffett, has unwound a deal that prevented it from selling its near 4 per cent holding in ASX-listed Insurance Australia Group.
The arrangement, put in place in 2015, was ended as part of IAG’s broader deal for Berkshire Hathaway’s National Indemnity Company to extend a quota sharing agreement until 2030.
Under the agreement, IAG will hand Berkshire Hathaway 20 per cent of its insurance premiums in exchange for the American group picking up an equal share of claims and expenses, the insurer said.
Berkshire Hathaway took a 3.7 per cent stake in IAG for $500m in 2015 on the condition it would not sell down that holding when IAG acquired the American insurance giant’s local personal, and small and medium business lines.
Berkshire Hathaway increased its stake to 4 per cent in 2020.
IAG said the move to end the equity and strategic deal was a “maturing” of the nearly 20 year relationship between the two. But the conclusion of the deal will also allow Berkshire Hathaway to directly compete with IAG in the Australian insurance market.
IAG chief executive Nick Hawkins, who played a key role in negotiating the deal in 2015, said the agreement was “critical” to the capital structure of the listed insurer. “The Berkshire deal, they were more than happy to extend it to the end of the decade,” he said.
The 2015 deal was the first of several quota share deals struck by the listed insurer and reinsurance partners over recent years. In 2017 IAG struck a deal with Munich Re, Swiss Re, and Hannover Re to take up a combined 12.5 per cent share of IAG’s Australian, New Zealand and Thai businesses. IAG renewed 10 per cent of this deal on Monday as it sealed its new reinsurance cover for the year.
“When we look at all our funding, we want to get ahead of any contractual end date and want to make sure we have plenty of time to renew that,” Mr Hawkins said.
He said that while the Berkshire Hathaway deal had ended, the two companies would continue to have an important relationship. “We sort of thought, just for simplicity and the fact we moved on a little bit, we’re clearly big partners with Berkshire – we don’t need a contractual equity relationship to demonstrate that they’re taking all our business in the next seven years,” he said.
“I’m not aware of anything that’s going to happen.”
Hannover Re is now IAG’s only quota partner still in negotiation with the insurer over the renewal of its share. But Mr Hawkins said there was “no sticking point” between the two sides.
“We’ve announced what we’ve announced, I would expect over the next couple of months we’ll finalise that as well,” he said.
Morgan Stanley analyst Andrei Stadnik said like IAG’s quota share renewals with Munich Re and Swiss Re, the pricing on the Berkshire Hathaway deal was “moderately less favourable”.
However, he noted IAG expected no impact to its 15-17 per cent medium term margin target.
“This improves capital optionality, but we think IAG will hold a capital buffer for Greensill and (Australian Securities and Investments Commission) litigation,” he said. “The new … agreement removes strategic relationship and subscription agreement, allowing direct competition with IAG, and Berkshire Hathaway can sell down its stake in IAG.”
The finalisation of the quota share arrangements comes after IAG struck a deal with its reinsurance partners on Monday. This limited IAG’s costs from its first significant catastrophe event to $350m, up from $250m in 2022.
After IAG’s quota share partners pick up their shares, this will drop to $236m, up from a maximum exposure of $135m in 2022.
IAG’s total reinsurance expenses are expected to rise to as high as $820m in 2023, up from the $659m the listed insurer reported in 2022.
Mr Hawkins said IAG’s reinsurance pricing was going to be a “challenge for the next year or two”. “I see pricing as being quite strong from reinsurers going forward,” he said.
IAG shares were up 1.2 per cent – or 6.5c – to $4.85 on Wednesday, rising 9.6 per cent in 12 months.
Originally published as IAG ends strategic relationship with Berkshire Hathaway, extends profit-loss quota sharing
Federal Labor on a collision course with miners over green push
The federal government has made a powerful enemy for itself in the west after the Chamber of Minerals and Energy WA said it would fight Labor’s push for so-called nature-positive laws.
Doug’s big bling pays dividends
Former Terrace old boy Doug Tynan is receiving a few strange looks for sporting brooches and necklaces made by a French luxury fashion house. But there is a good reason.