AIG New China JV: A $500 Mln Bet For PICC
The uneasy partnership formed more than half a year ago between US insurance giant AIG (NYSE: AIG) and China’s PICC Group (HKEx: 2328) has taken another tentative step forward with the finalization of a joint venture between the 2 companies. The move marks a symbolic one for AIG, reversing its global pullback of the last 5 years after it nearly collapsed at the height of the global financial crisis in 2008.But symbolism aside, AIG has proceeded with extreme caution in this new tie-up from the start, most likely due to the bad experience by most foreign insurers in China to date. AIG placed its bets on PICC when it purchased $500 million worth of the Chinese company’s shares as part of its Hong Kong IPO last fall. Shortly after that, the 2 sides announced they were exploring a potential tie-up. (previous post)
Some 6 months later, AIG is announcing what looks like a modest joint venture plan. The new joint venture will be an insurance agent that will develop and sell its own products, and also sell existing products from both PICC and AIG. (company announcement) AIG will own 25 percent, while PICC will own the remaining 75 percent, with the venture set to start service early next year.
The fact that they’re calling the joint venture an insurance agent, rather than a real insurer, seems like an interesting distinction to lower expectations for the new partnership. Such agents are typically resellers of other companies’ insurance policies, meaning they are middlemen that get most of their money from one-time commissions. By comparison, traditional insurers get most of their income from regular premiums paid by customers.
In this case the venture would also develop its own insurance products, though I would expect the majority of its business initially to come from selling existing AIG and PICC policies. The fact that the venture is 75 percent owned by PICC seems a bit ominous for AIG, since that will mean the new company could easily end up heavily favoring PICC products over comparable ones from AIG.
I’ve called this venture a “$500 Million Bet For PICC” in my headline because I think that’s what is really at stake here. AIG invested that amount in PICC’s IPO, and made it clear that it expected to get more from the partnership than just newly issued shares of one of China’s leading insurers. But if AIG doesn’t like the way the joint venture develops, I could easily see it dumping that stake in the next few years.
If it did dump the stake, AIG would hardly be the first major western company to follow such a path due to failure to gain any strategic advantage from the tie-up. The last 2 years have seen a steady stream of major US financial firms dumping similar stakes in Chinese counterparts, including HSBC’s (HKEx: 5; London: HSBA) sale late last year of its 15.6 percent stake in insurance giant Ping An (2318; Shanghai: 601318) for $9.5 billion.
I’m sure that AIG is going into this new tie-up with a healthy degree of caution, since no other foreign insurers have made much headway into the China over the last decade despite the market’s huge potential. I commend AIG for its cautionary approach, and think its $500 million investment will give PICC incentive to help the venture succeed. But at the end of the day, I would still only give the venture a 50-50 chance of success, based largely on the failure of previous similar ventures due to the difficulties of the market.
Bottom line: AIG’s new joint venture with PICC looks like a cautious new play into the market for AIG, with a 50-50 chance of success.
Related postings:
