AIG Faces Host of Obstacles to Sale of Asia Assets

A year ago, when American International Group Inc. [18540] announced plans to sell its life insurance businesses in Asia and refocus on its nonlife business, speculation on potential buyers circulated rapidly, involving rival insurance groups from North America to Europe, Japan, China and India.

A year later, the bidding for AIG's assets in Asia has proved low-key, mainly involving sales of noncore units in asset management and financial services. AIG has found it tough to sell entire insurance units to help it repay its US$182.5 billion bailout from the U.S. government.

From its Shanghai beginnings in 1919, AIG built up its footprint in Asia long before any other foreign insurance players and AIG's Asian insurance assets are now dominant in many markets in the region. But some say hope appears to be fading for AIG to sell significant life insurance assets such as Alico Japan and other units under its American International Assurance [55661] division.

For potential buyers, a marriage with any of AIG's units would require careful consideration, as the acquisition involves not just assets but also long-term liabilities tied to insurance policies. In taking a closer look at AIG's assets, potential buyers have to review underlying political issues, regulatory constraints, corporate culture, business models, marketing strategy and product portfolios on top of the financial consideration, said Arthur Hau, associate professor of finance and insurance at Lingnan University in Hong Kong. These concerns have overshadowed interest in AIG's life insurance assets in Asia, dominating the concerns of interested buyers.

AIG has to sell its assets to repay its debt, but at the same time, Hau said the insurer has to consider politics in the United States. AIG cannot be in a rush to sell its assets, he said.

The financial crisis has sent a message to the financial services industry to not "take something when you don't know the risk," said Michael Sherris, executive committee member and former president of the Asia Pacific Risk and Insurance Association.

An adverse event in the financial services sector can impact the whole economy, said Sherris, also professor of commerce and economics at University of New South Wales in Australia.

AIA is a collection of "valuable assets" across Asia with a huge customer base, said Jin Chuan Duan, director of risk management institute and professor of finance at National University of Singapore. Among its funding options, AIG may look to liquidate its assets through an initial public offering to attract funding while also looking for buyers.

An IPO of AIA would be "a big event" and positive development, said Terry Mezger, principal and practice leader of Deloitte Actuarial and Insurance Solutions. Given Asia's growth potential, Mezger noted such an IPO would create a new insurance entity with a global platform.

Capital Pressure

In addition to AIG's problems, tightening credit and capital woes in an unsettled financial environment are forcing investors to be more cautious. The global financial crisis has eroded earnings of many companies, making large-scale mergers and acquisitions difficult to pursue, said Hau.

Acquisitions require "an enormous amount of capital" but cash can be difficult to get in deteriorating global capital markets, said Hau. Share prices of insurers and financial institutions have tumbled in the past year, making capital a critical financing problem for acquisitions.

Liquidity is not just an issue for insurance companies but also for otherwise well-performing financial institutions. Hau pointed out that in spite of the positive performance in its first half, Standard Chartered Bank needed to raise fresh capital to fund its expansion in Asia, where the bank is looking for bargain deals for asset acquisitions.

On top of the fundamental cash issue, political concerns over AIG's situation, as well as any potential buyer's domestic regulatory limits, are big considerations. Integration of corporate culture, business models and product profiles are also areas that are not easy to reconcile.

Even for buyers with adequate capital, domestic economic pressure has limited expansion plans. The China Insurance Regulatory Commission, for instance, said last December that Chinese insurers should focus on local markets, not overseas acquisitions, in support of the country's stimulus economic plan.

In Japan, insurance companies are also facing demographic issues with an aging population and sluggish premium growth, said Neil Katkov, managing director of the Asian research group at Celent, an international management and business consultancy.

In the past year, most parties mentioned as possible bidders for AIG assets were insurance or financial services groups. The driving force for an insurance acquisition is primarily to serve the purchaser's goal of acquiring market share for its existing insurance or related financial services businesses. It is unlikely that an unrelated operator would acquire an insurance business just for an asset investment, said Hau.

Skepticism about AIG's assets in connection with the financial crisis may discourage interested parties. Negative spread issues related to AIG's assets raise concerns that a buyer may need to inject more capital.

In April, AIG injected total capital of 81.9 billion yen (US$874 million) into its three life insurance subsidiaries in Japan in a bid to boost their capital bases (BestWire, April 1, 2009). AIG pumped 29.4 billion yen into Alico Japan [84748], 22.5 billion yen into AIG Edison [88621] and 30 billion yen into AIG Star [85459].

In Taiwan, AIG injected NT$45.1 billion (US$1.37 billion) into Nan Shan Life Insurance Co. [86003] last November. The insurer said the capital injection was part of Nan Shan's NT$47.2 billion fund-raising plan to issue 472 million new shares.

In Japan, Katkov said AIG is perceived to be "too risky" as insurance companies are unsure about how AIG's complex business structures are associated with the financial crisis. In buying AIG's assets, Japanese insurers consider integration with such a complex structure is a major concern.

Japanese financial institutions have tried to distance themselves from risk associated with the financial crisis. There is a very "deep perception" issues over AIG's assets that are considered risky, said Katkov.

In July, AIG said it will accelerate steps to position Alico as an independent entity, seeking an initial public offering and public listing in New York (BestWire, July 16, 2009). AIG said the final decision on the IPO will depend on market conditions, and if it goes forward, Alico will have a separate board of directors and management team.

In Japan, Katkov noted consolidation would likely be an outcome for AIG as this is also a general trend for the insurance sector. A public listing plan for Alico in New York would give the insurer more room to sell in Japan, Alico's biggest country operation.

Politics and Products

The U.S. government effectively owns 80% of AIG, making the country's taxpayers de facto shareholders of the insurance group -- a vivid thought in the minds of potential acquirers.

Any potential buyer would see an uncertain political picture regarding the U.S. government's stance on AIG's assets as a hurdle, said Hau. He cited the political and legal row Bank of America faced after its acquisition of Merrill Lynch as an example of what might worry any potential bidder.

China Life Insurance Co. Ltd. [77626] said it dropped out of bidding for AIG assets due to an uncertain investment environment, as well as the U.S. government's bailout policies regarding AIG. In February, China's largest life insurer said the bid proposal was "inappropriate to its own investment directions" and that its "situation was changing" (BestWire, Feb. 27, 2009).

In August, China Life said the company is reviewing the possibility of investing in AIA, after reporting first-half results showing a net profit surge of 15.08%, partly due to investment gains. China Life Chairman Yang Chao said investment bankers had contacted company and asked about its interest in a potential AIA initial public offering.

Diversity in regulatory systems is also an area of concern for potential buyers, said Hau. For instance, he noted that Manulife Financial Group [76411], an active player in Asia, is subject to Canadian regulatory requirements, which are different from the U.S. system.

A clash of corporate culture and business models can also prevent an acquisition. Potential buyers can come from diverse cultural backgrounds, and some are accustomed to a conservative business approach while AIG has taken on an aggressive strategy in Asia. Hau said the integration of business strategy in terms of marketing, distribution, agent networks and products portfolios is not easy to achieve.

For instance, Hau said AIA's life insurance products may have investment linkages to AIG's mutual funds. This may create uncertainty and trouble for an acquirer.

AIG is viewed as very aggressive in its marketing model, but many Japanese insurers do not want to be seen as that aggressive, said Katkov. "Japanese firms do not often buy international firms to begin with," he said.

Buying into AIG's assets was not a consideration for Tokio Marine Holdings Inc. [50962], the largest Japanese nonlife insurance group, for instance, even though it is pursuing an international growth strategy for long-term business development. "We don't see any value of buying AIG assets [life units] and their business model in Japan," said Tokio Marine spokesman Jake Ishii last December (BestWire, Dec. 15, 2008).

Social Issues

Recent bidding for AIG's Taiwan life unit, Nan Shan Life, has presented potential buyers with new hurdles. Taiwan is a "very localized market" that carries with it considerations other than business factors, noted Hau.

In a letter to bidders, Nan Shan's "salespersons' rights committee" said company sales activity "has a widespread impact affecting not just the salespersons but also policyholders." The agents group has demanded settlement of pension benefits and indemnification for "opportunity loss" in business during the bidding process.

"We are really on the same boat; a satisfactory deal will be mutually beneficial. And it wouldn't be rational buying a shell," said the agents group.

Taiwan's Financial Supervisory Commission has affirmed its supervisory role in looking at the interests of policyholders and employees. The regulator said it wants to see the long-term business goals of any buyer, according its statement on the bidding for Nan Shan.

"AIG is looking for buyers and we're not discriminating against any entity who would like to acquire the business. But the buyer should have a long-term goal to manage the business," said FSC Commissioner Bill Chang.

Nan Shan is a profitable business in Taiwan, noted Chang. The US$3.1 billion target price for the insurers should not be an issue for some interested bidders who have the capability to raise funding, he said.

For such a large deal, Chang said discussions should take "a long time." He said Nan Shan has to sort out internal problems with agents, employee compensation and retirement benefits aside from any transaction.

An IPO on the local stock exchange can be a possibility for Nan Shan, but there are systematic considerations for Nan Shan ahead of a listing, according to Chang, who also a professor of risk management and insurance at National Chengchi University in Taiwan.