Allianz has pulled out of South Korea, selling its poorly-performing business in the country to Anbang, the acquisitive Chinese group which last week failed in its quest to buy Starwood Hotels.

The disposal is a setback to the German insurer’s ambitions in Asia, where it sees growing scale as a way to hit its ambitious target of 5 per cent annual earnings growth. Last year it teamed up with Baidu to offer digital insurance in China, and also expanded in the Philippines.

The German group has been in South Korea for seventeen years, owning life insurance and asset management businesses. Just after it bought into the country in 1999, it said that it was “well on the way to combining Korean and Western insurance expertise into an effective, profitable business approach.”

But the Korean business, which accounts for a quarter of Asian life insurance premiums, has failed to live up to those early ambitions. Last year it reported a €244m loss, following a €51m loss the year before. In 2015 it was the group’s worst performing life insurance business. Anbang said it was paying more than $3m for the operations.

Competition is severe in South Korea’s crowded insurance industry, which is dominated by local companies such as Samsung, Hanwha and Kyobo Life Insurance. Life insurance is popular in South Korea, where more than 80 per cent of people are covered by a policy because of the country’s weak social safety net.

Allianz’s local business has also had to deal with generous guarantees that it offered years ago when interest rates were higher. The average guaranteed rate on its Korean business is 4.4 per cent, well ahead of what it has promised elsewhere. Capital requirements for these guarantees under the EU’s new Solvency II rules have exacerbated the problems.

Analysts have for some time seen Korea as a weak link. “We believe South Korea is an ideal example of the type of business that Allianz management may consider disposing of,” wrote Citi analyst Farooq Hanif in a note last week. “If a local domestic player is interested in this asset, this may create substantial regulatory arbitrage by allowing the local company to remove Solvency II constraints and apply less stringent local capital requirements.” He estimated that a disposal could release €1-2bn of surplus capital.

This is not Anbang’s first foray into Korea. The Chinese group bought a controlling stake in South Korea’s Tongyang Life Insurance for Won1.13tn ($977m) last year. By merging the two businesses, it would create the country’s fifth-largest life insurer with Won39.2tn in total assets.

Allianz will be following in the footsteps of other western financial companies that have found life too difficult in the country. HSBC shut down its South Korean retail banking operations in 2013 while Goldman Sachs Asset Management pulled out of the country in 2012. ING in 2013 sold its Korean life insurance unit to the country’s largest private equity group MBK Partners for Won1.84tn.

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