U.S. insurer American International Group said on Thursday it is forming a joint venture with the life insurance unit of Chinese insurer People's Insurance Co. of China, that may put it in direct competition with its former Pan-Asian insurance unit.
The news comes as the US insurer it will buying US$500 million worth of shares in the up to US$3.6 billion IPO of PICC., making it the single largest foreign shareholder in China's fourth largest insurance company.
The $500 million to be invested in PICC's IPO by AIG, which traces its roots to an insurance organization founded in Shanghai in 1919, is likely one of its biggest investments in Asia since being bailed out by the U.S. government during the financial crisis. The planned investment in China's fourth-largest insurer would be a reversal for AIG, which was forced by the U.S. government to sell most of its crown jewel Asian life-insurance operation, AIA Group Ltd., to help repay bailout money.
AIG now owns 13.69% of AIA, which went public in Hong Kong in October 2010.
The planned joint venture may put AIG in competition in China with AIA, the only foreign company that has a full license there, after years of lobbying Chinese leaders. AIG's planned joint venture with PICC will distribute life insurance and other insurance products through a specialized agency force throughout the country, focusing on the major cities in China.
PICC, which makes most of its money from property and casualty insurance.
PICC's life-insurance business was ranked fifth in the Chinese insurance market in terms of premiums for the first nine months of this year, according to the China Insurance Regulatory Commission.
The venture AIG said it wouldn't sell more than 25% of PICC's shares in the next five years without the Chinese insurer's consent, unless the legal documents for the joint venture haven't been drawn up in the next six months.
China, a potentially lucrative market for insurers, is still dominated by domestic players, who held 96% of the market in 2011, according to McKinsey & Co.
Sino-foreign JVs held just 4% in 2011, down from 8% in 2007, as foreign players lost out to small domestic players who are gaining an increased share in the country's growing insurance market.
AIA's share is just between 1% and 2%, say analysts.
China's life insurance market has grown to become one of the largest in the world over the past decade, as the strong economic growth in the country and low penetration rates drive demand for products. In 2010, China's gross written premiums --a measure of revenues in the insurance business--accounted for 2.5% of its gross domestic product in 2010, lower than Hong Kong of 10%, India of 4.4% and Malaysia of 3.2%, according to McKinsey.
PICC is seeking to raise up to US$3.6 billion from its Hong Kong IPO, by selling 6.898 billion new shares in an indicative price range of HK$3.42 to HK$4.03. The price range represents between 1.22 and 1.96 times PICC's 2012 forecast embedded value.
China Life Insurance Co. Ltd., China's biggest life insurer by premiums, is trading at 1.5 times, while Ping An Insurance (Group) Co. of China Ltd is trading at 1.4 times, according to a Deutsche Bank's report dated Friday.
Embedded value represents the future profits an insurer's existing life-insurance policies are expected to generate.
PICC has so far secured 16 cornerstone investors buying around $1.72 billion of its IPO. Among them are AIG and state-owned China State Grid Corp., the country's largest power company, which will take $300 million worth of shares.
AIG would own around 2.7% of PICC if the IPO is priced at the top end of PICC's planned range for selling shares.
AIG already owns 9.9% of PICC's Hong Kong-listed property-and-casualty unit, PICC Property & Casualty Co., which it bought into in 2003.
Cornerstone investors, an Asian phenomenon, are guaranteed allotments of shares in an IPO and in return agree to hold the shares for a set period.
|
