IAG expects its new “partner”, US investment conglomerate Berkshire Hathaway, will give it “significant capital flexibility” as it considers further expansion in Asia.

As reported by insuranceNEWS.com.au last week (see earlier story), IAG caught the market by surprise when it announced Warren Buffett’s Berkshire Hathaway has acquired a 3.7% stake in the company for $500 million and has struck a 10-year 20% quota share agreement.

Under the quota share arrangement, effective from July 1, Berkshire Hathaway will receive 20% of IAG’s consolidated gross written premium (GWP) and pay 20% of claims.

The two companies have also agreed on a swap of businesses: IAG will acquire Berkshire Hathaway’s local personal and SME lines, and Berkshire Hathaway will acquire the renewal rights to IAG’s large-corporate property and liability insurance business in Australia.

The rights to be transferred by IAG represent less than 1% of its annual GWP.

Berkshire Hathaway will also reimburse IAG for its share of operating costs and pay a percentage-based fee that recognises the value of accessing the insurer’s core franchise.

Mr Buffett says the partnership will “help fast-track our entry into this region”.

Similarly, Berkshire Hathaway’s investment in IAG will enable the Australian insurer to pursue further growth opportunities in Asia.

IAG MD and CEO Mike Wilkins has targeted six markets in Asia: India, Thailand, Malaysia, Vietnam, Indonesia and China. He describes China as a “source of enormous potential growth”.

The company expects the quota share arrangement will result in a reduced capital requirement of about $700 million over the next five years, with about $400 million of that to be realised next financial year.

Despite IAG’s interest in Asia, ratings agency Standard & Poor’s does not expect any major announcements in the short term.

“We expect any expansion activity IAG undertakes in Asia will remain modest relative to the size of its Pacific operations,” the ratings agency said in a bulletin released the day the deal was announced.

Morningstar insurance analyst David Ellis agrees it may take some time see what direction IAG takes with its powerful new backer.

“It’s the first step in the dance,” he told insuranceNEWS.com.au.

See ANALYSIS