Buffett’s first move was to sink a thoughtful few hundred million in to Insurance Australia Group (IAG). Many local investors followed suit happily, buying IAG shares with abandon. Buffett, however, wasn’t playing marbles with this deal. The IAG move includes a 10 year 20 percent cut of IAG’s premiums and Berkshire Hathaway paying 20% of IAG claims.
IAG states that this will cut its capital needs by $700 million over the time frame. Someone commented that Buffett was getting 20 percent of IAG’s business for 3.7 percent of its capital.
Buffett says he’ll be investing in Australia on a regular basis in the future to the tune of $2 billion a year, which is an interesting development in its own right. The very China-oriented Australian share market could use some encouragement, and Buffett’s presence in the market will definitely create interest in Australian shares.
Also very interestingly indeed, future Australian investments will be at least partly funded by the IAG deal. That’s an unusual, but very clearly laid out model, using locally sourced capital and not depending entirely on a feed from the U.S. end. You don’t really need to be hit over the head with a shovel to see this investment is expected to deliver significant returns and pay its own way.
The difference between a neophyte international investor and an expert can also be seen from the currency arrangement for Buffett’s Australian venture — he’s paying with Australian dollars, not U.S. dollars, to hedge against any negative currency moves. Compare this to Japanese investment issues with an erratic Aussie dollar which effectively neutered a lot of their yen-based capital in Japan, when the rising yen value went down against the Aussie dollar.
Some of us locals might also say that Warren Buffett’s expertise will be much appreciated in the Australian financial sector. His quite modest, no-nonsense approach has been demonstrated on a routine basis over the years. In the somewhat neurotic Australian financial sector, investors will be pleased to hear some plain speaking for a change.
The problem is that he probably won’t buy our largest white elephant, an acquired and expensive taste called Parliament which we believe comes from some other, much less interesting, planet. Perhaps a theme park, Mr. Buffett?
