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How Insurance Australia Group Ltd shareholders benefit from Buffett

Warren Buffett

It’s been quite an interesting time for four of our top insurers.

In the past month, two shares have risen and two have fallen, and now that we’re in the middle of reporting season, only one has reported positive earnings to date. Let’s take a closer look:

Company 1 month performance Profit
Insurance Australia Group Ltd (ASX: IAG) 7% 1H16 down 19.5% to $466 million
AMP Limited (ASX: AMP) 4.8% FY15 up 10% to $972 million
QBE Insurance Group Ltd (ASX: QBE) -3.9% TBA
Suncorp Group Ltd (ASX: SUN) -0.35% 1H16 down 16% to $530 million


IAG has seen the best price performance over the past month, up 7%, but the company recently released its 2016 half year report announcing a 19.5% drop in earnings to $466 million. While AMP, with a share price that has risen 4.8% over the past month, released its 2015 full year report announcing its profits were up 10% to $972 million.

QBE is down 3.9% for the month, while we’re still waiting for its earnings report, and Suncorp is also down 0.4%, and its 2016 half year profits were down 16% to $530 million.

IAG shareholders benefit from Buffett.

IAG shareholders are benefiting from the insurance giant’s tie-up with Warren Buffett’s holding company, and could do so for years to come.

While IAG’s first half profit dropped, its 10-year deal with Berkshire Hathaway, which kicked in on July 1, means it had extra capital to hand back to investors in the form of a special dividend.

Australia’s biggest insurer said on Wednesday it will pay a fully franked special dividend of $0.10 cents per security on top of an unchanged interim dividend of $0.13 cents.

It has also upped the percentage of full year cash earnings it will hand over to 60% to 80%, from 50% to 70%, starting this full financial year.

“We now require less capital to run our company, so you can see some capital creation as we’re only on risk now for 80 per cent of the business we’re writing,” chief financial officer Nick Hawkins said.

“In terms of our actual net profit, it has a minimal impact.”

Berkshire Hathaway receives 20% of IAG’s gross written premium in exchange for paying 20% of its claims.

Mr Buffett’s company also pays IAG a so-called exchange commission, which added 250 basis points to the underlying insurance margin.

The margin improved from 13.3% to 14.2%.

IAG said it expects its full year underlying insurance margin to be at the lower end of its previously issued guidance of 14% to 16%.

A reinsurance arrangement with Berkshire Hathaway has mitigated exposure to the 2011 Canterbury earthquakes and asbestos-related liabilities.

“We’ll continue to take risk off the table around any future uncertainty,” Mr Hawkins said.

Gross written premium declined to $5.5 billion from $5.6 billion, with net profit for the six months to December 31 down to $466 million from $579 million for the prior corresponding period.

“The real driver for why our net profit after tax is down is our shareholder funds,” Mr Hawkins said.

“It’s really driven by equity markets. It’s nothing to do with Berkshire.”

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Motley Fool contributor John Hopkins has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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