Sources have reported that Berkshire Hathaway Inc. BRK.B is gearing up to expand its insurance business in Australia by selling policies to hospitals and medical practices in Australia.
This news indicates that the company is building on a strategic measure earlier taken by the company when it announced that it would buy a 3.7% stake in Insurance Australia Group Ltd. (IAG). Per the deal, Berkshire Hathaway would pay $388 million to IAG and will receive 20% of its insurance premium payments. Berkshire Hathaway will also be in charge of paying 20% of claims on those policing for a period of over 10 years.
These efforts signal Berkshire Hathaway’s intention to expand its commercial insurance operations in Australia via a unit named Berkshire Hathaway Specialty Insurance, formed in 2013. The unit also has operations in Singapore and Hong Kong. The company also announced plans of expansion in New Zealand by opening an office in Auckland.
The company is quietly expanding its insurance operations, in order to capitalize on a fast-growing market that is believed to be underserved by existing insurers. Though insurance majors such as Prudential Financial Inc. PRU and MetLife Inc. MET have been operating in the region, changing demographics still presents scope for new entrants.
Warren Buffett, the CEO and chairman of Berkshire Hathaway plans to invest the capital received from the deal in buying stakes in other Australian businesses such as banks. Traditionally Buffett, the main hand behind all the investments in the company had used surplus funds or moat generated by its insurance units to make numerous acquisitions over more than 50 years. Courtesy of the huge capital release by its insurance units, the company has now become a conglomerate with over 90 subsidiaries engaged in business from selling ice-cream to insurance. Investible surplus money, called float, was about $83.5 billion at the end of Mar 31, 2015.
Though the company runs heterogeneous businesses, the front runner remains insurance which generated maximum return on equity. Therefore the company remains committed to develop this business. Moreover, Berkshire Hathaway is strengthening other insurance units since Buffett is foreseeing that heightened competition will hurt its reinsurance business which will likely suffer over the next decade.
Berkshire Hathaway presently carries a Zacks Rank # 3 (Hold). A better-ranked stock is Endurance Specialty Holdings Ltd. ENH. This stock carries a Zacks Rank # 1 (Strong Buy).
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