IAG's strategic partnership with Warren Buffett is starting to deliver

Warren Buffett. Photo: Drew Angerer/ Getty.

IAG’s deal with Warren Buffett’s Berkshire Hathaway is helping the group to ride out the volatility hitting the insurance industry.

The company still posted 14% fall in statutory profit to $625 million as gross premiums flatline in a tough market. However, insurance profit was up 6.8% to $1.18 billion and insurance margins improved.

IAG describes the result as “sound” in light of “challenging operating conditions in the Australian and New Zealand commercial markets”.

The company also announced a $300 million off-market share buyback and a final fully franked dividend of 13 cents a share. This brings the full year payout to 26 cents, down on the 29 cents of 2015.

IAG’s insurance margin was 14.3%, a 360 basis points rise on 2015, a number boosted by about 2.5 percentage points because of the Buffett deal. In 2017, IAG expects margins to be between 12.5% and 14.5%.

The Buffett uplift effect on margins can be seen in this chart:

Source: IAG

Gross premiums were down 0.6% to $11.44 billion and the company expects these to continue to be flat in 2017.

This week both QBE and AMP reported weak insurance revenue and sliding profits.

However, the Buffett deal at IAG has helped the insurance company ride out volatility and reduce the need for capital.

“The Berkshire Hathaway quota share arrangement continues to perform well for us, reducing earnings volatility and releasing capital,” says CEO Peter Harmer.

The quota share arrangement started in July 2015, a deal which will run for a minimum of 10 years. It essentially means that Berkshire Hathaway gets 20% of IAG’s gross written premiums and pays 20% of claims.

IAG says this has reduced earnings volatility by exchanging a portion of its insurance risk for a fee.

Berkshire Hathaway also took a 3.7% stake in IAG for $500 million.

IAG’s results in detail:

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