Berkshire's Aussie Exposure
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Warren Buffett had better hope that Insurance Australia Group, the country’s biggest general insurer (or property and casualty in US parlance) runs a tight underwriting and insurance book ship, maintains standards and doesn’t not veer off into a mad price war. Upwards of 40% of one of Buffett’s key reinsurance companies is now flowing each year from a deal with IAG that helps underpin the financial viability of both companies.
The 2017 annual report from Warren Buffett’s Berkshire Hathaway (http://www.berkshirehathaway.com/2017ar/2017ar.pdf) has revealed something surprising - the 20% quota share deal it has with Insurance Australia Group has become vital to the premium and earnings from the Buffett’s key reinsurer, National Indemnity (or NICO Group).
The 20% quota share deal with IAG means Berkshire pays 20% of the claims IAG receives each year in exchange from 20% of annual premiums. Berkshire has picked up a 3.7% stake in IAG as well under the 10 year deal that started in 2015.
The deal is a 10-year whole of account quota share arrangement started on July 1, 2015. Under it, Berkshire Hathaway receives 20% of IAG’s consolidated Gross Written Premiums (GWP) and pays 20% of claims. Berkshire Hathaway will also pays IAG for its share of operating costs and also pays a percentage-based fee which recognises the value to Berkshire (through NICO) of accessing IAG’s strong core insurance franchise (ie its brands).
But the Berkshire report shows that the IAG deal is a major earner for NICO, and made the Berkshire company (one of its major reinsurers) very dependant on IAG, as Berkshire directors explained:
"A significant portion of NICO Group’s annual reinsurance premium volume currently derives from a 10-year, 20% quota-share agreement with Insurance Australia Group Limited (“IAG”) that became effective July 1, 2015. IAG is a multi-line insurer in Australia, New Zealand and other Asia Pacific countries.”
Berkshire said that NICO Group’s premiums earned were $US4.451 billion, down $US198 million (or 4%) in 2017 compared to 2016 when the figure was $US4.646 billion, while premiums written declined slightly to $US4.371 billion from $US4.433 billion.
"Roughly 40% of NICO Group’s premiums written and earned in 2017 and 2016 derived from a 10-year, 20% quota-share contract with Insurance Australia Group Ltd. (“IAG”) that incepted in July 2015.” That equates roughly to around $US1.78 billion a year in income from the 20% share of IAG’s premium income, or around $A2.2 -$A2.3 billion). Berkshire’s insurance businesses lost more than $A150 million fro Cyclone Debbie last year, according to the June and September quarter financial reports. There was no new estimate in the December quarter report or in the annual report.
The report revealed that NICO had a pre-tax underwriting loss of $1.044 billion because of the three hurricanes in the US, the Mexican earthquakes, Cyclone Debbie and the Californian wildfires. NICO earned a pre-tax underwriting profit of $US767 million in 2016.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.