Why Australia's IAG threw in the towel on China

Fri Oct 16, 2015 6:39am EDT
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By Swati Pandey

SYDNEY Oct 16 (Reuters) - When Insurance Australia Group , 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 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 Inc , 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 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 and Ping An Insurance .

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.   Continued...