Insurance Australia Group has suffered a major blow to its ambitions to grow in the rapidly expanding Chinese financial services market.
Our biggest general insurer yesterday revealed it had ended talks to buy a stake in Shanghai-based China Pacific Property Insurance Co.
IAG agreed in July last year to buy 24.9 percent of the unit of China Pacific Insurance (Group) Co for around $375 million to enter a market where sales of insurance products grew almost 10 per cent in 2006.
IAG has been negotiating for the past three years to buy the stake but seems to have been almost 'gazumped' by a combination of the China stockmarket boom, a greedy management of the insurer and some big US private equity funds which have muscled their way into a near 20 per cent stake.
US investors, including the private-equity firm, Carlyle Group, acquired a combined 19.9% stake in China Pacific Insurance (Group) Co. by subscribing to the insurer's new share offer, according to an announcement at the start of last week. The other US group involved was Prudential Financial.
China's third-largest life insurer plans a Hong Kong stock market listing in an IPO shortly and this complicated matters for IAG.
IAG said completion of its deal was delayed by "changes and uncertainty'' within China Pacific Insurance as it prepared for an initial share sale. This included the introduction of U.S. private equity shareholders at China Pacific Insurance "which places new constraints'' on Insurance Australia's planned investment.
IAG said yesterday: "IAG announced in February 2006 that it had signed a memorandum of understanding with China Pacific Insurance (Group) Co., Ltd (CPIC) to acquire 24.9% of CPPI.
"In July 2006 draft transaction agreements were confirmed and lodged with the China Insurance Regulatory Commission (CIRC).
"However, final execution of the transaction was delayed by changes and uncertainty within CPIC as it prepared for an IPO. Most recently, this has included the introduction of US private equity shareholders at CPIC level, which places new constraints on IAG's proposed investment in CPPI.
"IAG Chief Executive Officer, Mr Michael Hawker, said that he was extremely disappointed that the transaction with CPIC was unlikely to proceed, particularly when IAG had displayed maximum flexibility and good faith in accommodating changes requested by CPIC to the original in-principle July 2006 agreements.
"Our strategy for the Chinese market has been clear. We are a long-term strategic investor that aims to use our underwriting, risk and claims management expertise, as well as our track-record in general insurance, to create value for both our partner and our shareholders," Mr Hawker said.
"CPIC, due to its own IPO and related US private equity considerations, is not currently able to offer us a pathway to a strategic shareholding in CPPI. The partnership vision, which we had developed together with CPIC and CPPI over a three year period, would have allowed IAG to transfer its underwriting, risk and claims management expertise to CPPI.
"However, shorter-term considerations by CPIC around its proposed IPO, and particularly US private equity participation in that IPO, now appear to dominate CPIC's strategy.
"We remain committed to the Chinese general insurance market and continue to pursue various opportunities with the goal of creating shareholder value through participating in this market as a long term strategic investor."
IAG has been involved in the Chinese general insurance market since 1999 through its investment in China Automobile Association (CAA), a road service operation which also distributes insurance products for the top three national insurers. IAG was also working with CIRC on regulatory developments.
Normally news of a major reserve to a company's well defined and highly thought of corporate strategy would be reflected in a weaker share price.
But if anything ,the market 'liked' the news, pushing IAG shares up 5c to $6 on the ASX.
IAG already has assets in Asia, where it owns businesses in Thailand, Malaysia, and Singapore, as well as China Automobile Association.
It has also expanded into the competitive UK market over the past nine months to try and offset rising competition levels in Australia and downward pressure on premium rates.
