Last week there was an awful lot of hype surrounding the deal struck between the Warren Buffett-led Berkshire Hathaway and Insurance Australia Group Ltd (ASX: IAG).
The deal sees the two insurance groups form a strategic partnership which involves a 20% quota share agreement and also involves Berkshire acquiring a $500 million shareholding in IAG.
The excitement is understandable given this deal involves the world's most famous investor Warren Buffett and given it's the first time that Buffett has made a direct investment in an ASX-listed stock.
The release of details surrounding the deal and further comments obtained by Fairfax in an interview with the 'Oracle of Omaha' have (somewhat predictably) led to speculation about what other ASX-listed stocks might be on Buffett's radar.
The speculation has centred largely on the banking sector and it is interesting to note that all four of the major banks have enjoyed gains greater than both IAG and the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) since the announcement.
While investors who have 'front-run' any investment by Buffett in the banks might consider themselves winners so far, it is important to understand the bigger picture which Buffett is viewing.
While news of a $500 million investment grabbed headlines, what really matters to Buffett is the circa $2.5 billion in annual insurance premiums that Berkshire Hathaway will receive as part of the quota share arrangement for the next decade.
In reality, this deal means Berkshire Hathaway needs to find somewhere to invest this substantial annual premium income and ASX-listed stocks are the obvious place. As Buffett stated in a recording regarding his deal with IAG, he will indeed be looking to invest around $2 billion per annum into Australian equities.
Just as no-one saw Buffett coming prior to the IAG announcement it is unrealistic to think you can accurately predict where he will invest next.
Buffett certainly is no stranger to the Australian banking sector – he has met ex-head of Westpac Banking Corp (ASX: WBC), Mr David Morgan, on more than one occasion. In fact, I would be very surprised if Buffett hadn't been keeping tabs on Aussie banks for years and given his analytical skills he probably knows their businesses in more detail than most Australian-based investors do!
So perhaps Buffett will buy some bank shares, perhaps he won't… The one thing you can be sure of however is that he won't be in a rush and he'll wait till he sees plenty of value, and that could be a long way from where bank stocks are currently trading.
