IAG in Asia retreat

June 22 2018 by Nick Ferguson

IAG is selling all of its subsidiaries in Asia after a strategic review of its business in the region concluded that opportunities for growth are limited.

Tokio Marine & Nichido Fire Insurance will buy its operations in Thailand, Indonesia and Vietnam. The Japanese property-casualty insurer is A$525 million (US$390 million) for IAG’s 98.6% interest in Safety Insurance in Thailand and its 80% holding in Asuransi Parolamas in Indonesia. In a separate transaction, Tokio Marine bought IAG’s 73.07% interest in AAA Assurance for an undisclosed sum.

“We are pleased to accept the offer for our businesses in Thailand and Indonesia from Tokio Marine,” said Peter Harmer, IAG managing director and chief executive. “We believe Tokio Marine is an ideal owner given its experience in the region, and that this is a good outcome for the associated employees, customers and other stakeholders.”

The sale follows a decision in October to shelve its growth strategy for the region as a result of what it described as declining commercial and regulatory conditions. Instead, the company said it would shift its focus back to its Australian and New Zealand markets.

The Aussie insurer has partly blamed its retreat on the short-sighted strategies of some of its competitors, who have engaged in what IAG has described as “uneconomic pricing” in a bid to escape lacklustre growth at home and buy market share in the Asian growth story.

Prudential’s group chief executive Mike Wells made a similar criticism earlier this year, when he complained in an interview that new entrants “tend to be fairly irrational in their pricing”.

“If you’re in a boardroom in the US or Europe, and you don’t have growth, you need a pin on the map of Asia, and say to your board members: ‘We’re there too.’,” he said. “I’m always leery when someone says pricing is strategic. That basically means it’s not profitable.”

Prior to the sale to Tokio Marine, roughly half of IAG’s premiums in Asia came from Thailand, while India and Malaysia each contributed about a quarter of its regional premiums, plus a very small amount of business from the units in Vietnam and Indonesia. Overall, Asia contributed 3% of its gross written premiums.

It will retain its minority interests in AmGeneral in Malaysia and SBI General in India for now. It owns a 49% stake in the Malaysian joint venture and 26% in the Indian business. And while it does also own a 16.9% interest in Bohai Property Insurance in China, this is no longer treated as part of the business in its accounts and is instead included in its investment portfolio.

The company has said that it sees the Indian market as a strong growth opportunity for insurers, but it has also lamented the government’s “emphasis on majority Indian ownership and control”. Despite regulations allowing foreign shareholders to own up to 49% in Indian insurers, IAG has not increased its stake from the previous limit.

In its latest earnings announcement, the company said that its Asia strategy has focused on growth through market consolidation and increased ownership, and that its “current assessment is that such opportunities are limited”, despite a 5.2% increase in gross written premiums in Asia.

The region produced profits of A$15 million in the first half of IAG’s financial year, up from A$2 million in the same period last year, thanks to better results across the three main markets. Premium growth was driven by the India business, while there were softer conditions in Malaysia after the country’s tariff liberalisation on motor and fire policies.

IAG said that it expects to book an after-tax profit of at least A$200 million from the combined transactions, which should add at least 13 basis points to its common equity Tier 1 ratio. It also forecasts that the sale will improve its insurance margin by 50 basis points.

 

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