Posted on Aug 16, 2011 by Sergio Ulloa
Australia's largest general insurer Insurance Australia Group (IAG) has acquired a strategic interest in China's Bohai Property Insurance Pty Ltd as part of the company's long-term effort to boost its presence in Asia's rapidly developing insurance markets.
On Monday, IAG announced that a deal had been reached to buy a 20 percent stake in Bohai Insurance for CNY 687.5 million (US$107 million). The deal presents the Australian insurance giant 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. The transaction is expected to be completed by the end of 2012, pending regulatory approval, and will be funded through IAG's internal resources.
IAG's Chief Executive Officer, Mike Wilkins, described the acquisition as an important milestone for the company that would enable their Asian business division to meet and perhaps surpass its objectives of contributing 10 percent of IAG's gross written premium 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 at a press briefing, adding that once the partnership was finalized "IAG will have a foothold in the two fastest growing economies in Asia and most populous countries in the world - China and India."
Together with Suncorp, IAG dominate the Australian market, with a combined market share of almost 70 percent of the country's insurance business between them. Given these limited options for domestic expansion, the firm earmarked Asia as its prime target
for sustainable profitability. In 2007, IAG acquired a 26 percent stake in The State Bank of India for US$170 million, to write motor and corporate insurance policies. The firm has also since established operations in Thailand and Malaysia. Today, IAG's Asian business still contributes only US$430 million towards the company's US$8 billion total in gross written premiums. The Australian insurer has long targeted a partnership in China due to its expanding economy, low penetration rates for insurance and growing per-capita income.
Bohai Insurance was identified as a strong strategic fit for IAG's investment. The Chinese insurer has been a strongly capitalized company, focused predominantly on motor insurance, which is a product line IAG has had traditional strength in. Bohai has strong government support, a recognizable domestic brand, and an established multi-channel distribution network of roughly 265 provincial and city-based branches, with over 3,000 employees. Since its inception in 2005, Bohai has been able to generate annual gross written premium in excess of US$200 million, together with a strong focus on underwriting discipline and risk management, particularly important factors 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 analysts, Bohai will be on track to turn an operational profit by the 2013/14 financial year.
"The two companies have got a shared vision and a commitment to people, culture and risk and importantly, Bohai has demonstrated a disciplined approach reflecting a tightly controlled centralized underwriting and claims functions, all of which we're very comfortable with," Mr. Wilkins told reporters.
As per the terms of the agreement, IAG have secured board representation in Bohai as well as senior management roles in key portfolios, in line with their other operations in Asia. Once the deal is finalized, IAG will bring its technical expertise, particularly in underwriting claims and actuarial knowledge, to the fore and look to further add value in developing Bohai's direct distribution channel and technological promotion capabilities. The two companies are confident that by combining their strengths, the will be able to create a solid platform for long term insurance growth and profitability in China.
IAG have also highlighted the importance of the company's location within China. Bohai is based in Tianjin, at 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. Bohai Insurance is majority owned by group of state-owned companies in the Tianjin Economic-Technological Development Area (TEDA) and their experience in attracting and incorporating foreign investment in the region will help ease the transition for AIG's involvement. The scale and strength of TEDA and its related entities in the region will provide substantial business opportunities for Bohai Insurance going forward. 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, just in that region of China alone.
Justin Breheny, CEO of IAG's Asia division, noted that China's continued economic development would support a growing insurance industry, and that getting involved in this lucrative market was obligatory. 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 expected to increasing in tandem, growing from 10 percent to 15 percent annually through the next decade. "This strong growth outlook is supported by low penetration rates, a large population, growing per capita income and asset accumulation. Already it is the largest individual market for new vehicle sales, exceeding the US½Such high levels of domestic consumption, of course, are underpinning demand for insurance," Mr. Breheny explained.
In conjunction with rising insurance demand, IAG credited improvements to industry regulations in China, including tighter controls over pricing mechanisms and business practices, with improving the sector's underwriting discipline and overall profitability. 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 (PICC, CPIC, Ping An and China United) 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.
Indeed, IAG's involvement comes on the back of several other recent foreign entrants into China's insurance market. Earlier this year, Goldman Sachs acquired a 12.02 percent stake in Taikang Life Insurance Co Ltd
. The acquisition provided the US Investment bank with a long-sought-after foothold in the world's sixth largest insurance market. This was followed by Bermuda-based private insurance holding company, Starr International's purchase of a 20 percent stake in the Chinese property insurer Dazhong Insurance Co Ltd
. Merger and acquisition activity throughout the rest of Asia is set to continue at a fervent pace throughout 2011. Further investment is only set to increase, as the emerging insurance markets in Asia are now widely expected to outperform that of other more mature markets, with China leading the way.
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.