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IAG (ASX:IAG) share price rises on Berkshire Hathaway deal

The Insurance Australia Group Ltd (ASX: IAG) share price has risen after announcing a renewed deal with Berkshire Hathaway.

IAG is the insurance parent company of a number of brands including NRMA, CGU, SGIO, SGIC and WFI (Australia), NZI, State, AMI and Lumley (New Zealand).

It underwrites over $13 billion of insurance per annum through these leading brands.

IAG agreement with Berkshire Hathaway

The insurance giant announced that it had renewed its largest ‘whole of account quota share’ (WAQS) agreement, with a subsidiary of Berkshire Hathaway called National Indemnity Company (NICO).

IAG has agreed terms to renew the agreement with Berkshire Hathaway, which represents 20% of the total 32.5% WAQS program.

This renewed agreement, which is effective 1 January 2023, applies until 31 December 2019.

However, the ‘strategic relationship agreement’ and the ‘equity ownership subscription agreement’, announced in June 2015, will not be continuing under the new arrangements.

IAG said it has now renewed 30% of the 32.5% WAQS, with Munich Re, Swiss Re, and Berkshire Hathaway. Negotiations for the remaining 2.5% are expected to be completed in the coming months.

Management comments

The IAG chief financial officer Michelle McPherson said:

Berkshire Hathaway is a key partner of IAG and we are pleased to extend our strong relationship through to the end of the decade.

The Berkshire Hathaway agreement delivers IAG a materially consistent financial outcome to the original agreement and supports out 15% to 17% medium-term reported margin target.

The terms of the renewed agreement with Berkshire Hathaway’s NICO reflect the maturing of our partnership, and the removal of supporting subscription and strategic relationship agreements provides consistency with our other quota share partner arrangements.

What to make of this for the IAG share price

I’m no expert on insurance, but it seems like a good deal for IAG to want to pursue this.

Are IAG shares an opportunity? Higher interest rates can certainly help the insurance business generate stronger returns on the cash and bonds that it has.

However, the IAG share price seems to be hurt every time there’s a hit to the share market or a bad weather event.

I’d rather invest in other ASX dividend shares for growth and consistency.

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At the time of publishing, Jaz does not have a financial or commercial interest in any of the companies mentioned.
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