US insurance giant Berkshire Hathaway has ended an equity ownership subscription agreement with Insurance Australia Group, instead renewing only its quota share agreement with the Australian insurer until 2030.
The parties first agreed on an equity ownership subscription and strategic relationship in 2015. Under its terms, IAG acquired Berkshire Hathaway’s local personal, small business, and medium business lines, while Berkshire Hathaway bought a 3.7% stake in IAG for half a billion dollars with the assurance not to sell its stake despite IAG having acquired its Australian business.
The end to the parties’ equity ownership subscription arrangement would in effect allow Berkshire Hathaway to directly compete with IAG in the Australian insurance market, The Australian reported.
The quota share agreement, extended to Dec. 31, 2029, provided for IAG to hand Berkshire Hathaway 20% of its insurance premiums. In exchange, the Warren Buffet-controlled insurance giant would pick up an equivalent share of claims and expenses, a deal IAG chief executive Nick Hawkins said was critical to its capital structure.
Following its successfully negotiated quota share agreement with Berkshire Hathaway, IAG has since completed similar deals with partner insurers and reinsurers. IAG has also recently renewed 10% of a 12.5% quota share agreement with Munich Re, Swiss Re, and Hannover Re for a stake of 12.5% in IAG’s Australian, New Zealand, and Thai businesses.
“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,” Hawkins told The Australian.
While Berkshire Hathaway has chosen not to renew its equity ownership subscription and strategic relationship with IAG, IAG did not think this would have any bearing on the two insurance giants’ relationship moving forward. Instead, the agreement not to renew the strategic relationship agreement was reached after the “maturing” of the two insurance giants’ long-standing 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 …,” Hawkins said.
IAG is still negotiating the renewal of the rest of its 12.5% quota share agreement with Munich Re, Swiss Re, and Hannover Re. Once its quota share partners pick up their shares, however, IAG’s exposure will drop to US$236 million, The Australian reported.
