(BRK.A), (BRK.B)
Berkshire Hathaway is investing in South Australia, the conglomerate is taking over the Motor Accident Commission’s ‘back book’ of Compulsory Third Party (CTP) vehicle insurance claims.
The South Australia treasurer, Rob Lucas, said Berkshire Hathaway would establish operations in Adelaide as its Reinsurance Division takes over management of the Motor Accident Commission’s ‘back book’ of Compulsory Third Party (CTP) vehicle insurance claims.
Lucas said the move – to take effect from January 1, next year – was a natural consequence of the former Labor government’s decision in 2014 to privatize the provision of CTP vehicle insurance in SA and would put the state on the map with global investors.
“This is a significant coup for South Australia,’’ said Treasurer Lucas.
“Having an investment company of Berkshire Hathaway’s global standing come and set up in Adelaide not only speaks volumes for our sound business environment, but for the progressive leadership of the new Liberal government under Premier Steven Marshall.
“Berkshire Hathaway’s reinsurance arm, National Indemnity Company, is the only reinsurance company in the world with the same AA+ credit rating as South Australia, offering SA policy claimants security over future claims, as well as excellent value for taxpayers who no longer bear the risk of movements in investments and claims outcomes.
“For example, this year’s Mid-Year Budget Review will include a significant reduction in returns to the budget from MAC.
“Put simply, assets and liabilities from MAC will be transferred to Berkshire Hathaway’s National Indemnity Company, so that all the risks of managing MAC’s liabilities will be transferred to Berkshire Hathaway.
“Part of the arrangement will see $300 million of the reinsurance premium retained in South Australia – with at least $100 million retained for five years – for local funds management.
“The Government will consider a range of options to help implement a key election commitment to grow local funds management activity.”
Berkshire Hathaway CEO and Chairman Warren Buffett said he looked forward to the potential of growing his business in South Australia.
“We are thrilled to have agreed terms with South Australia to reinsure their auto liabilities, and we would love to find more opportunities to do business there,” Buffett said.
Berkshire Hathaway Inc. also has significant worldwide interests in energy, utilities, infrastructure, rail, retail and manufacture.
In October, the State Government announced it would wind down the Motor Accident Commission, a ‘natural consequence’ of the former Labor Government’s decision in 2014 to privatize the provision of CTP vehicle insurance in SA – which had been MAC’s core function.
MAC ceased writing new CTP insurance policies from July 1, 2016 but has remained responsible for managing a ‘back book’ of claims issued up to and including June 30, 2016.
The MAC Board has approved acceptance of the Berkshire Hathaway bid.
Background
The former Labor government, in September 2014, approved a new framework to assess unsolicited proposals to government.
Under this framework, and just prior to the state election, Berkshire Hathaway submitted an unsolicited proposal to the former Labor government to manage the ‘MAC back book’. This bid was only valid for an off-market exclusive transaction.
Treasury engaged respected financial advisory firm Moelis who concluded the proposal was unique and presented as value for money. Moelis recommended approval for the proposal and concluded Berkshire Hathaway’s history supported the conclusion that the Berkshire Hathaway bid was only valid for an off-market exclusive transaction.
The existing Allianz claims management contract will remain in place at least until its current expiry of June 30, 2019. Berkshire Hathaway will explore with Allianz long-term arrangements. Claimants will not experience any change in their claims management experience.
After the deal is concluded, budgeted returns from MAC to the budget will reduce by up to an estimated $68 million over the 3-year period from 2019-20.
Early next year, the Government intends to release most of the contractual documentation with some commercially confidential provisions redacted.
© 2018 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.