Building a 21st Century Business: focus on Asia
02 May 2012
Address by Mike Wilkins, Managing Director and CEO, IAG
To the Trans Tasman Business Circle
I'm particularly pleased to be part of the Circle's Asian Business Series as Asia is very close to our hearts at IAG and I am sure to many of you as it continues to play a more dominant role in our economy and in our boardrooms.
Today, I am going to talk to you about how IAG is building its 21st century business as an Australasian general insurer, the importance of Asia to our overall strategy, and the reasons behind our selection of Asia as the next logical step in our growth ambitions.
To date diversification has been the key driver to us becoming a major player in the insurance industry. In the 1990s we were predominantly a motor and home insurer, with about 90% of our risk concentrated in NSW and the ACT. If we hadn't diversified, a major event in those areas would have had a significant impact on the company.
The following years have seen us grow in the interests of diversifying our risk, first interstate and then offshore, as we have built operations in New Zealand, the UK and Asia.
As a result, IAG is now an international general insurance group, diversified globally and by product line, with some of the most respected brands in their respective markets. Here in Australia you may know us as NRMA Insurance, SGIO, SGIC, CGU or Swann Insurance.
IAG will always predominantly be an Australian and New Zealand based insurer and one area of our focus is on targeting profitable growth in our home markets. April's acquisition of AMI aligns with that strategy and confirms our position as the number one general insurer in New Zealand – but given our size domestically these opportunities are limited and we can't restrict our view to our largely consolidated home markets.
That leaves us with a few strategic options. We could stay dormant – a position unsatisfactory to us and no doubt to our shareholders. We could look at other sectors or financial services products but we do general insurance well, it is our expertise and in our DNA, or we could look offshore and IAG is looking to Asia.
SO WHY ASIA?
When looking globally any company that ignores the new Asian century does so at its peril.
The Asian Development Bank has estimated by 2030 Asia's annual consumption will reach $32 trillion – almost half of all global consumption. As a result Asia's middle class population will double.
There is little doubt that our economic ties to Asia were the basis of our mutual resilience to the GFC. Australia's exports to Asia are now worth more than $175 billion from our total export pool of $280 billion – around 60 per cent.
With Europe, the US, and UK seeing their relative economic power decline, Asia has become the world's new powerhouse economy. Although some in Asia would say that the last 400 years have been an anomaly and the normal economic order is now being restored.
The 2011 UN Report on world economic prospects notes that East Asia will continue to be the fastest growing economy in the region with China and India leading the pack. China already has the largest individual market for car sales, exceeding the USA. The International Monetary Fund as recently as last month said although Asia was not immune to challenges, it was projecting growth in the region at 6 per cent this year - higher in China and India - with robust domestic demand, favourable financial conditions and room for policy easing.
But it is not just sheer economic might that makes Asia such a compelling proposition for IAG; if Asia's middle class population doubles so does their asset ownership and need to protect those assets through insurance in a market where insurance penetration is low.
The geographic proximity to Australia also has appeal as a similar time zone reduces some of the inherent risks and difficulties in trying to run a business on the other side of the world.
All this doesn't mean we are pursuing growth for growths sake. Given that most Asian markets are only partially deregulated from an ownership perspective, when entering new markets we always maintain our strict criteria around partner selection. This includes ensuring an alignment of long term strategic objectives and aspirations for the joint venture, our ability to influence outcomes via key IAG held management positions, a fair price and the ability to meet IAG's longer term return hurdles.
Importantly in a number of cases our investment has gone into the joint venture company rather than to our partners and that to us demonstrates an even greater alignment of interest and desire to see our JV succeed.
When Australian companies look to set up off shore businesses from time to time you do hear noise from various commentators about the associated risk. To be fair we learnt some lessons with our UK business in a mature insurance market where the expertise we could add was limited. In Asia the opposite is true.
OUR CURRENT ASIAN FOOTPRINT
So, what does our Asian operation look like?
We are at an exciting time as we look to grow our existing businesses as well as explore new opportunities in markets we think are politically, socially and economically ready for growth in their financial services sector.
IAG has already built a strong base in Asia through a number of established businesses and joint ventures in India, Thailand, Malaysia, China and most recently Vietnam.
In India we partner the country's largest bank – the State Bank of India and are now writing a number of product lines.
State Bank is a great partner which gives us access to its 140 million customers and a network of more than 18,000 branches; and we have the option to increase our stake in the joint venture to 49% (from 26%) once India lifts its foreign direct investment caps.
India is a priority market for us with the general insurance market now approximately A$10b in size, a low penetration rate of 0.6%, and is growing at is growing by 15-20% each year. There are now 1.2 billion people in India, up 17.6% in the last decade, an increase approximately equal to the total population of Brazil. By 2016 IAG expects that the SBI General business will write AUD 1 billion in GWP and secure a top 5 market position.
In Thailand we operate via a majority owned business in Safety Insurance, and in Malaysia we have a 49% joint venture with AmBank.
Both Thailand and Malaysia are large, stable insurance markets, with forecast growth rates above western mature markets. Our businesses in these markets are growing strongly, and producing attractive returns for us. We have successfully grown our presence earlier this year with our Malaysian joint venture having recently entered into an agreement to acquire insurer Kurnia Insurans (Malaysia).
This was a particularly pleasing transaction for us. The combination of AmG and Kurnia creates a business with a leading share of more than 13% of Malaysia's general insurance market and will create the largest motor insurer with a share of around 22% of the motor market.
In China we have entered a strategic partnership with a Chinese general insurer, Bohai Property Insurance, which has given us a foothold in a region that contributes almost 30% to China's annual insurance premium pool of around US$60 billion. Our 20% equity stake in Bohai has strong government support, our partner is the economic development arm of the Tianjin government, gives us a well-known brand and a solid distribution network, all of which give us a good competitive position in that market.
China continues to be an extremely attractive market to us.
It has forecast GWP growth of 10-15% over the next 5 to 10 years.
Lastly, we most recently announced our entry into Vietnam, the second fastest growing economy in Asia.
Around two weeks ago we acquired 30% of AAA, Vietnam's sixth largest motor insurer.
As you can see, over the past couple of years we have got real traction in Asia and our stable of Asian businesses are performing well. We have some experience of the markets and are now looking forward to entering what I believe is a very exciting time for our Asian ambitions.
OUR LONGER TERM VIEW
Given Asia's importance to our overall strategy, we have made it a key strategic priority for us over the next four years to expand our existing footprint in Asia so that it grows to represent 10% of Group revenue on a proportional basis.
While this is a sound and sensible objective to capitalise on Asia's emerging strength, IAG has very much taken a long term view of its Asian operations as the reality of today's environment - and current restrictions on foreign ownership - mean that Australian businesses like ours need to be patient, which suits us fine.
We get to build our credibility locally and add value through our specialised insurance expertise and experience by partnering with trusted local brands. This puts us in the right position to take advantage of the relaxation of ownership regulations as those economies develop and governments become more comfortable with the concept.
For example, until recently we only held 30% of our Malaysian joint venture until Malaysia's regulations were relaxed enabling IAG to dial up its shareholding to 49% which we did. More recently Malaysian regulations were further relaxed to now allow 70% ownership by foreign investors.
Despite the hurdles we will always enter an Asian market with a view to ultimately being a top three player. While our current focus in Asia is on generating operating scale through ensuring our businesses are growing at the top and bottom line, we have also started to look to enter additional markets such as Indonesia.
Indonesia is the largest economy in South East Asia with strong demographic fundamentals, similar to India and China. It has a population of over 230 million and an increasing proportion of middle and higher income households.
We have completed a detailed strategic review of the Indonesian market and we believe it represents a very strong opportunity and there is the added appeal of being able to own up to 80%. Entering Indonesia would also open a new growth and learning opportunity in providing takaful insurance - insurance that observes the rules and regulations of Islamic law.
So in summary we have six target Asian markets and we are already in five.
BEING SUCCESSFUL IN ASIA
So how can Australian businesses be successful in Asia?
Given our focus on Asia I am fortunate to be a member of the Asia Capable Workplace Taskforce as part of Asialink. Our work supports calls that from the Boardroom to the frontline across small, medium and large organisations we must do more to make sure Australia properly seizes the opportunity that we have been presented.
I acknowledge a great deal of that challenge rests with us as drivers of Australian business, but it also requires government support, particularly in the crucial roles of education and training.
We must capture every opportunity to ensure future employees are Asian ready with investment in secondary schooling to improve student intercultural skills and knowledge of Asia, not to mention raising levels of student participation in studying Asian languages. On the tertiary stage a re-evaluation of Asia focussed curriculum would be welcome with the vast majority of Australian business wanting to see an integrated focus on Asia as part of tertiary coursework.
An "Asian capable" employee is someone who has knowledge on the broader political, regulatory, historical, religious, economic and cultural contexts of Asia. They are sophisticated in cross-cultural communication skills, can agree on new ways of working and have a mindset that is open and empathetic. And that is just the tip of the iceberg.
When I speak to our people who have had the chance to take an Asian posting I know that many find it liberating and they come back energised and serve as great ambassadors internally for working in such a vibrant and dynamic environment.
The personal growth that you will achieve through such an opportunity ultimately can only equate to better career prospects. My advice to anyone who has the chance to broaden their experience with such a posting is to take it.
However, it is not for the faint hearted and personally, you do have to be prepared to learn a whole new way of doing things. The people who survive and prosper in such an environment are those who embrace the differences and understand that difference is just that - difference – it is not better and it is not worse.
The first step for us as business leaders is to practically and honestly evaluate the existing Asia capabilities we already have internally and how we grow and develop the appropriate expertise. Not an easy task when you understand that Asia is made up of many individual cultures and countries and your expertise must be relevant to the specific Asian locality.
At IAG we support the embedding of our Asian expertise in a number of practical ways. These include Asian talent development and retention programs, sharing Asian expertise across managers, placing senior staff on the ground and hosting Board meetings in Asia to ensure our Board is thoroughly involved in local market strategies and that there is clarity on the Asian operations at the highest levels.
Organisationally, if you are planning to enter the market you need a logical and well thought out strategy and you need to stick to it. Agree on a shared vision up front with your partner and don't force or push your solution onto them – let your partner pull what they need from you - and remember, that the best Asian capabilities are developed when resources are shared in a reciprocal way.
You may also need to learn to live with some ambiguity, which as you can imagine is a big ask for an insurance company!
As I said this is an exciting time for IAG and it is an exciting time to be in doing business in some of the world's new powerhouse economies.
Having learnt some of the fundamentals for success in Asia I am excited by the journey and very pleased with what we have achieved to date. We are now energetically focusing on the future and the success of our next generation of shareholders and management by investing today in Asia for a diversification, growth and profit benefit tomorrow.
I encourage more Australian businesses to embrace the Asian opportunity.