Omaha, Neb.-based Berkshire has bought newly issued IAG shares equivalent to a 3.7% stake for A$500 million ($388 million), and will also take a 20% tranche of IAG's premium income and liabilities under a 10-year deal. The arrangement allows for Berkshire to take a further 5% of the company within the next two years but caps its ultimate stake at 14.9%. Berkshire has agreed to retain its initial 3.7% holding for the duration of the 10-year alliance.
The alliance with IAG, of Sydney, builds on a 15-year-old commercial relationship between the two companies. It reflects Berkshire's ambition to expand in the Asia-Pacific region and follows the launch of its recently established Berkshire Hathaway Specialty Insurance business in Australia earlier this year. IAG, the leading personal and commercial insurer in Australia and New Zealand, is in the throes of making its debut in Indonesia and recently lifted its stake in an Indian affiliate. It is also targeting expansion in Thailand, Malaysia and China.
"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," Buffett said in a statement.
On a video, he added: "Despite the fact we are in a great many businesses our first love, our long-time love, our future love has always been the insurance business.
"We believe ...that each company will benefit in a very substantial way. Even though this contract runs for 10 years I expect that for decades and decades and decades to come both companies will benefit in ways that we can't even perhaps visualize right now."
For IAG, the farm-out of a 20% slice of its business and the sale of shares will strengthen its capital position, and help it achieve its targeted return on equity of 15%.
IAG managing director and CEO Mike Wilkins said the deal "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."