SYDNEY (REUTERS, BLOOMBERG) - Warren Buffett's Berkshire Hathaway Inc has bought a 3.7 per cent stake in Insurance Australia Group for A$500 million (S$521 million) as part of a partnership that IAG said would reduce its capital requirements and support its return on equity targets.

Berkshire will buy 89.77 million shares at A$5.57 each, IAG's closing price on Monday, and take a 20 per cent quota of IAG's consolidated insurance business over 10 years, IAG said on Tuesday.

The deal with the world's best known value investor would support IAG's goal of delivering 15 percent return-on-equity through the economic cycle, it said.

IAG shares jumped as much as much as 5.9 percent in Sydney, the most in more than three years.

IAG will use the deal to reduce its exposure to payouts from natural disasters, such as the November 2014 Brisbane hailstorm that caused about A$1.35 billion in industry-wide losses.

IAG is one of the world's largest purchasers of catastrophe reinsurance, and has had a reinsurance agreement with Berkshire Hathaway since 2000.

"Our strategic partnership with IAG will help fast-track our entry into this region," Mr Buffett said in the statement. "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."

Omaha-based Berkshire Hathaway owns insurer Geico and reinsurer Gen Re and made about 29 per cent of its pretax income last year from insurance, according to data compiled by Bloomberg.