Warren Buffett’s Berkshire Hathaway, which last year bought into Australia’s IAG, has been helping the insurance group limit its exposure to claims from earthquakes in New Zealand and asbestos-related liabilities
Buffet, said to be the most successful investor of the 20th century, paid $500 million for a 3.7% stake and has an option to take that to 14.9%.
IAG, which today posted a 19.5% fall in first half net profit to $579 million, also announced an “innovative” reinsurance transaction with Berkshire Hathaway.
The company has already exceeded its $NZ4 billion reinsurance limit for the February 2011 Canterbury earthquake. The deal with Berkshire Hathaway effectively provides cover of up to $NZ5 billion via $NZ600 million of protection in excess of $NZ4.4 billion.
The adverse development cover is part of a package of reinsurance which also provides protection relating to legacy liability and workers’ compensation policies with exposure to asbestos risk, the majority from business written by CGU in the 1970s and 1980s.
And IAG says the deal will mean a small negative earnings impact in the second half of the year. However, it also reduces uncertainty in relation to these exposures, strengthening the group’s risk profile.
CEO Peter Harmer says IAG delivered a sound operating performance in an increasingly complex and dynamic environment.
“We are pleased with the performance of our consumer businesses where we have been able to broadly maintain market share with limited movement on price – demonstrating the strength and resilience of our franchises,” he says.
“In our commercial businesses we are prudently maintaining our underwriting discipline in the most competitive conditions in almost four decades.”
In today’s half year results, IAG’s gross written premiums fell 1.1% to $5.603 billion because of difficult commercial market conditions and lower compulsory third party insurance volumes.
And IAG expects premium growth to be relatively flat. The margin guidance remains at 14% to 16% for 2016 and is now expected to be at the lower end of this range for the full year.
Harmer, who announced an organisation structure in December last year, says the group is focused on driving future growth and profitability by sharpening its focus on customers’ needs.
IAG declared a fully franked special dividend of 10 cents a share.