IAG Seal Bohai Shares Purchase
By Marius | Published April 13, 2012
Insurance Australia Group (IAG) finalized its acquisition of a 20 percent stake in China’s Bohai Property Insurance Ltd this week, marking the Australian giant’s first venture into the fast-moving Chinese insurance market. The move comes as part of the company’s long-term effort to boost its presence across Asia’s rapidly developing insurance markets.
IAG confirmed their purchase of a strategic interest in Bohai following the receipt of all required regulatory approvals in a statement made to the Australian Securities Exchange yesterday. The deal, for a reported sum of US$100 million, presents the Australian general insurer with its long sought-after foray into the world’s second largest economy. Under current Chinese market regulations, 20 percent is the maximum holding a single foreign investor is allowed to have in a domestic general insurance company. IAG first announced their investment plans for Bohai back in August, 2011.
IAG chief executive Mike Wilkins said that the acquisition was another important step for the company and one that would contribute to their growth target of having around 10 percent of premium income generated from Asia by 2016, “Bohai Insurance is an attractive partner and provides an exciting opportunity for us to meet our long held ambition of entering China’s general insurance market,” Mr Wilkins said in a press statement. IAG has reported a net profit of US$167 million in the first half of its 2012 financial year.
IAG and Suncorp dominate the Australian insurance sector and control almost 70 percent of the country’s insurance business between them. As this situation offers limited scope for domestic expansion, IAG now looks to the Asia Pacific region for sustainable premium growth. Over the past 5 years, the firm has seen its Asian footprint grow as far as Thailand, Malaysia and India. The insurer’s ambitious global growth strategy has also seen it buy a controlling stake in New Zealand’s AMI insurance business in the past week. IAG’s Asian business currently accounts for roughly US$430 million towards the company’s US$8 billion total in gross written premiums.
The Australian insurer has targeted a partnership in China specifically due to its expanding economy, low insurance penetration rates and a now more favorable business environment. Bohai Insurance was first identified as a strong strategic fit for IAG’s investment last year. Since its inception in 2005, Bohai has been able to generate annual gross written premium in excess of US$200 million. The Chinese non-life insurer has been a well-run company focused primarily on motor insurance, a product line that IAG has had traditional competitive strength in. In addition to this, Bohai have strong local government support, a recognizable brand, and an established multi-channel distribution network of roughly 265 provincial and city-based branches. The insurer has also demonstrated a commitment on underwriting discipline and risk management, which is particularly important for cautious Western investors. The price IAG has paid for their 20 percent stake would put the cumulative value of Bohai’s business at around US$500 million. According to market estimates, Bohai will be on track to turn an profit by the 2013/14 financial year.
IAG have also highlighted the importance of the company’s location within China. Bohai is based in Tianjin, the centre of the pan-Bohai economic development region in China’s north-east. The area is one of the most economically significant regions in China and receives direct central Government funding and supervision for new development initiatives. Currently the pan-Bohai region accounts for both a third of China’s gross domestic product (GDP) and a similar proportion of the country’s annual US$60 billion insurance premium pool (almost twice Australia’s totals). By comparison, IAG noted that the size of the pan-Bohai economy would be equivalent to the entire Indian or Russian market.
China’s continued economic development will continue to support it’s growing insurance industry, and thus the decision to enter this lucrative market was an easy one for IAG. China’s GDP is forecast to continue growing at over 9 percent per annum for at least the next couple of years. According to IAG, the country’s general insurance market is also expected to grow by about 10 percent to 15 percent over the next decade at least. In conjunction with rising insurance demand, IAG also credited improvements to industry regulations in China with improving the sector’s underwriting discipline and overall business forecast. These infrastructure efforts have, in turn, encouraged greater foreign investment in the country. The Chinese general insurance market, once dominated by four big state-owned players has become more open, enabling smaller companies, like Bohai, to remain commercially sound and present more profound and diverse opportunities for the international insurance industry. IAG and Bohai are confident that by combining their strengths, they will be able to create a solid platform for long term insurance growth and profitability in China.
Insurance Companies Mentioned
Insurance Australia Group
Insurance Australia Group (IAG) provides personal and corporate insurance policies under several different brands, including NRMA Insurance, CGU, SGIC, SGIO and Swann Insurance. The company has been the largest general insurer for Australia and New Zealand and is now expanding out of its home markets and looking to Asia for growth.
Bohai Property Insurance Pty Ltd
Bohai Insurance is a Tianjin-based insurance provider. The company was founded in October 2005 and today has over 250 provincial and city-based branches and a large network of agents.