SYDNEY - Mr Warren Buffett's Berkshire Hathaway will pay A$500 million (S$524 million) for a stake in Insurance Australia Group (IAG) in a deal that will accelerate sales of commercial coverage.
The agreement will give Berkshire 20 per cent of IAG's insurance premium payments and make it liable to pay 20 per cent of claims over a decade, IAG said in a statement yesterday.
Mr Buffett's company will get a 3.7 per cent stake in the Sydney-based firm through a placement of new shares.
Mr Buffett, 84, has been focused on expanding commercial insurance operations globally as competition increases in the reinsurance market.
In 2013, he hired four executives from American International Group to start a company called Berkshire Hathaway Specialty. That unit began operations in Australia this year.
"The transaction gives Buffett a significant long-term exposure to the Australian market at a reasonable risk," said Mr T.S. Lim, a Sydney-based analyst at Bell Potter Securities. "For Insurance Australia, it is about a long-term play. That is, having the resources and scale to frustrate the smaller players in the retail market."
The deal also frees up as much as A$700 million in capital over five years for IAG, it said, allowing it to focus on opportunities to expand in China, Thailand and Malaysia.
IAG has an option to place up to a further 5 per cent with Berkshire within 24 months, according to the statement.
Under a so-called standstill agreement, Berkshire will not increase its shareholding in the Australian insurer above 14.9 per cent for 10 years.
The Australian company said it will use the deal to reduce exposure to natural disasters. Last November's hailstorm in Brisbane in Queensland state caused about A$1.35 billion in industrywide losses.
IAG is one of the world's largest purchasers of catastrophe reinsurance, and has had a reinsurance agreement with Omaha, Nebraska-based Berkshire since 2000.
The agreement with Berkshire will reduce IAG's reinsurance needs by about 20 per cent, chief executive officer Mike Wilkins said on a conference call.
"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."