Fairfax media reported this morning that Insurance Australia Group Ltd (ASX: IAG) is looking to increase its footprint in China via acquisitions, on the back of recent, similar forays into that country as well as India, Malaysia, and other south-east Asian nations.
Following the Buffett deal earlier this year, IAG has $300m in cash and $15 billion in investments, meaning it is certainly well positioned to fund an investment in a major Chinese insurer.
However, given that management recently performed a $60m write-down on the company's $100m investment in Chinese automotive insurer Bohai, investors will wonder if another Chinese purchase is really a sound decision by management.
A write-down occurs when the value of a business must be changed to reflect its new (lower) earning capacity. They can happen for many reasons, but generally reflect that a business is not worth what management initially expected it to be worth when they bought it.
There is additional risk added by the likelihood that IAG will end up with a minority stake in a business (given Chinese laws oppose too much foreign ownership), which will limit how much say it has in the way the insurance business is conducted.
On the other side of the scales, China's Shanghai Composite Index is now trading roughly at the same level it was 5 years ago (down 40% in recent months) and acquisitions will cost substantially less.
Over the longer term, the demand for insurance can be expected to rise as medical costs rise (with a rapidly ageing population) and the standard of living improves. China certainly provides plenty of opportunity for IAG over the long term, but I would wait to see what management is buying and how much they pay before diving headlong into IAG shares.
