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RPT-Why Australia's IAG threw in the towel on China

Published 2015-10-18, 05:02 p/m
RPT-Why Australia's IAG threw in the towel on China
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(Repeats story published late Friday; no changes to text)
By Swati Pandey
SYDNEY, Oct 16 (Reuters) - When Insurance Australia Group
IAG.AX , the country's largest general insurer, announced
ambitious plans in June to ramp up its business in mainland
China, several institutional investors including Jason Kim were
seriously concerned.
Kim, a portfolio manager at Nikko Asset Management which
owns about A$143 million ($104 million) worth of IAG (L:ICAG) shares,
asked the board to reconsider, arguing China, the world's
fourth-largest insurance market, was difficult and high-risk.
Between June and September, institutional shareholders held
private discussions with senior executives at IAG, which is 3.7
percent owned by Warren Buffett's Berkshire Hathaway (N:BRKa) Inc
BRKa.N , people familiar with the matter said. They expressed
concerns about spending up to A$1 billion in a market where the
chance of failure was high.
"It's very difficult to get a decent, profitable presence
there without spending an incredible amount of money and having
a very, very long timeframe," Kim told Reuters. "Frankly, to us,
it didn't make sense."
Kim and others were rewarded on Thursday when IAG said it
will halt further investments in China. IAG shares, which have
underperformed rivals and the broader market .AXJO this year,
jumped 6 percent, adding about A$750 million in market value in
one day.
The revolt by IAG's shareholders underscores a deteriorating
international investment sentiment towards China's $314 billion
insurance industry, which is dominated by domestic heavyweights
such as China Life Insurance 601628.SS and Ping An Insurance
601318.SS .
Foreign insurers have long struggled to expand in China.
Indeed, heavy-handed regulations have seen overseas life
insurers' market share decline to 5.6 percent in 2013 from 8.9
percent in 2005, China Insurance Regulatory Commission data
shows. Foreign property and casualty companies have failed to
grow market share from 1.3 percent since 2005.
IAG is not the first large financial institution to throw in
the towel in China, but the abrupt and public U-turn is
something of a rarity.
Frustrated and disillusioned by the slow pace of
deregulation and increasing local competition, firms such as AXA
SA AXAF.PA and Sun Life Financial SLF.TO reduced ownership
in their China joint ventures about five years ago. New York
Life NYLIN.UL quit China completely in 2011.
Europe's Allianz ALVG.DE and Canada's Manulife Financial
Corp MFC.TO are among the global insurers still operating in
the world's second-biggest economy via domestic joint ventures.
In an emailed response to Reuters, George Sartorel, Allianz
Asia-Pacific regional CEO, said China is a "key strategic
market" for the company and is expected to overtake Japan as the
region's largest insurance market as early as next year.

BUFFETT'S HAND?
IAG announced plans to pursue a national insurance strategy
in China following a A$500 million equity raising from Berkshire
in June, part of an Asia strategy which included expanding in
Malaysia, consolidating in Thailand and raising its stake in its
joint venture with the State Bank of India SBI.NS .
Some analysts and fund managers Reuters spoke to said the
decision pointed to incoming CEO at IAG, Peter Harmer, who joins
next month and took investor feedback on board ahead of the
insurer's shareholder meeting on Wednesday.
Others pointed to Buffett himself being the driving force
behind killing the China strategy.
"I certainly think this decision was driven by Buffett's
investment in the company," said Romano Sala Tenna, fund manager
at Katana Capital, which sold its exposure in IAG earlier this
year. "The only major change to IAG's shareholder registry in
the time between it announced China expansion and the withdrawal
was Buffett's investment."
Berkshire Hathaway and Buffett were not immediately
available for comment.
A person with knowledge of IAG's thinking told Reuters the
decision "was not related" to Berkshire's investment in the
company, and was based on feedback from a number of investors
and their own initial due diligence.
"We wanted to be ambitious in China because that's what
really makes sense if you're looking for returns. But over the
last few months we looked very carefully and based on that we
have decided that we won't be investing in China," the person
added.
($1 = 1.3719 Australian dollars)

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