October 18, 2015 / 9:05 PM / 2 years ago

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

(Repeats story published late Friday; no changes to text)

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.

Frustrated and disillusioned by the slow pace of deregulation and increasing local competition, firms such as AXA SA and Sun Life Financial reduced ownership in their China joint ventures about five years ago. New York Life quit China completely in 2011.

Europe's Allianz and Canada's Manulife Financial Corp 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.

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 Reporting by Swati Pandey, with additional reporting by Elzio Barreto in HONG KONG; Editing by Lincoln Feast and Ian Geoghegan

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