Brought to you by:

IAG ditches China expansion plan

Facebook Twitter LinkedIn Google

IAG shares jumped more than 6% last week after the insurer confirmed it is dumping plans for major investment in China.

In a statement to the Australian Securities Exchange, IAG clarified its position “in relation to the investigation of opportunities to participate on a national scale”.

This follows shareholder feedback on market speculation, it says.

“After completing significant work on assessing the opportunities available, IAG has determined not to pursue further investment in China.”

MD and CEO Mike Wilkins says while the company believes in “the fundamentals of China”, its future focus will be on growth opportunities in other Asian markets and Australasia.

Morningstar insurance analyst David Ellis says Mr Wilkins hands over to successor Peter Harmer next month, and this may have played a part in the announcement.

“The new CEO may be less enthusiastic,” he told insuranceNEWS.com.au. “He needs to settle in and get things moving here in Australia. It is common sense really.”

Mr Ellis says many investors are “highly cautious” of Australian companies expanding into Asia.

“The share price was reflecting those concerns, and this calms things down. I think it is a good thing. I am all in favour of a steady and well-thought-out growth strategy, but it is hard for Australian businesses to be successful overseas.

“In China you are up against massive state-owned businesses that dominate the insurance market. It is hard to see how IAG could have had a major impact, and it is comforting that they are not looking at expanding aggressively in China.

“IAG needs to build up experience and knowledge of these countries, and that takes a lot of time. Asian markets in theory offer greater growth potential, but that doesn’t necessarily translate into greater profits.”

Commonwealth Bank analyst Ross Curran believes a $60 million writedown of IAG’s investment in Chinese motor insurer Bohai could have made shareholders nervous.

“I think [IAG] was pretty keen on China, but shareholders were concerned they didn’t have any real insight into that region, particularly after the Bohai writedown,” he told insuranceNEWS.com.au.

Mr Curran believes IAG’s Australian operation is one of the best insurance assets in the world, and there is no need for the company to push too hard overseas.

“You end up diluting what is a fantastic asset,” he said. “From a shareholder’s point of view, you are better off keeping that asset intact.”