AIG, PICC In Uneasy Partnership AIG拟与人保集团建合资寿险公司
China’s young insurance market has proven attractive to foreign players for its huge potential, but has also been an extremely difficult place for them to do business due to numerous obstacles and competition from local players. That reality appears to be a major factor behind an uneasy alliance that has just been announced between US insurance giant AIG (NYSE: AIG) and Chinese counterpart PICC Group, who have signaled their intent to form a life insurance joint venture just as PICC is raising up to $3.6 billion in a Hong Kong IPO.
This story is full of history, since AIG was originally founded in China in 1919 by an American entrepreneur and previously was quite bullish on the China market. But the company ultimately sold off most of its Asia operations as it briefly flirted with closure at the height of the global financial crisis. AIG has apparently learned something from its first foray into China, which never really went very far even though it was one of the first foreign companies allowed into the market.
Even the wording of the new tie-up announcement is filled with overtones of caution, saying simply that AIG is “exploring” a joint venture with PICC’s life insurance unit. (company announcement) That’s very cautious indeed coming from a company that once trumpeted the huge potential of the China insurance market, where life insurance premiums alone totaled $134 billion last year. (English article)
According to their joint announcement, AIG and PICC’s life insurance unit have signed a non-binding agreement that would see them set up a joint venture to sell life insurance and eventually other insurance products in China. The tie-up is part of a bigger package that is seeing AIG invest in PICC’s Hong Kong IPO, with AIG buying $500 million worth of shares in what could become the biggest listing in Hong Kong over the last 2 years.
PICC appears more interested in getting AIG’s money for the IPO than the joint venture, since the Chinese insurer is making its massive offering into an extremely weak IPO market and is selling about half of its shares to big institutional investors. AIG also appears to be aware of the situation, and has added an interesting provision to its investment agreement that looks designed to pressure PICC into making a sincere effort to form and promote the new joint venture.
As part of its IPO investment, AIG has agreed to hold onto at least 75 percent of its PICC shares for at least 5 years after the offering. But it has added a provision to that agreement that says it could sell the entire stake if the proposed new joint venture isn’t finalized by May of next year.
This kind of provision looks designed to avoid the previous mistakes made by many big foreign financial institutions, which thought they were getting an inside road to China with massive previous investments in major state-run banks and insurers. But they later found out their Chinese partners had little or no interest in forming serious strategic tie-ups.
As a result, big foreign players like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) have dumped most or all of their multbillion-dollar stakes in big Chinese banks over the last 2 years. The most recent case saw British banking giant HSBC (HKEx: 5; London: HSBA) put its entire $9.5 billion stake in Ping An Insurance (HKEx: 2318; Shanghai: 601318), China’s second largest insurer, up for sale earlier this week for similar reasons. (previous post)
I like AIG’s approach in this case, as it adds pressure to PICC in an effort to avoid repeats of past failed tie-ups. But at the end of the day, even if they successfully form a joint venture, I suspect that PICC will put little or no resources into such a company that would compete with its own wholly-owned insurance business. Accordingly, look for these 2 companies to ultimately reach a joint venture deal, but for the venture itself to be yet another disappointment like the many before it.
Bottom line: AIG and PICC will ultimately form an insurance joint venture, which will perform disappointingly due to lack of commitment from PICC.
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