Political Stumble for AIG Unit Sale

Earlier today, Taiwanese regulators rejected American International Group Inc.’s (AIG) bid to sell its Taiwanese unit Nan Shan Life Insurance Co. to a Hong-Kong based consortium, according to Reuters. The $2.15 billion bid by the consortium, which comprises Primus Financial Holdings Ltd., a Chinese investment firm, and China Strategic Holding Ltd., a battery maker, was rejected citing political concerns in the country. The buyers can file an appeal to the Cabinet within 30 days.

AIG had agreed to sell its Taiwan unit Nan Shan to the consortium in order to pay off its US government bailout money. The deal was earlier decided to be closed by July 2010. However, it got delayed by three months due to regulatory concerns in Taiwan such as the prohibition of Chinese investments in Taiwan and China Strategic’s long-term political connections with mainland China.

Further, Taiwan was apprehensive about the consortium’s inadequate experience in insurance business and the ability to raise funds for future operations.

Both AIG and its buyers tried hard to keep the Nan Shan deal on track. To ease the regulators’ concerns, they agreed to set aside $325 million from the proceeds in an escrow account for four years. The money was kept as buffer to maintain Nan Shan’s risk-based capital ratio, as required by the regulators’ requirements.

AIG hoped that the Taiwanese regulators would favor the deal. But earlier today, the Financial Supervisory Commission (FSC), one of the regulators of Taiwan overseeing the island’s insurance sector, stated that AIG’s sale of the Nan Shan unit to China Strategic would hurt the country’s financial security due to the inflow of Chinese money.

The rejection of the deal is upsetting for AIG, which has been planning to exit Taiwan since October 2009, after the global economic breakdown created an unprofitable investment environment and gave rise to operating challenges in the country.

However, the FSC denial has given a chance to Chinatrust Financial Holding, one of the biggest financial groups of Taiwan, to bid for Nan Shan. Chinatrust is known to have experience in insurance sector and may have a long-term interest in the industry. AIG now hopes to get regulatory approval.

Besides Chinatrust, a firm set up by a former Taiwanese diplomat, Wang Shih-jung, backed by Qatar’s sovereign fund unit and Japan’s Firix Partners Company, may also find interest in funding $2.5 billion for the bid to buy AIG’s Nan Shan.

Wang Shih-jung stated that $900 million of the bid cost would come from Japanese investors, $1.25 billion from a Qatari fund and the rest from Taiwanese banks.

Apart from Taiwan, AIG was also optimistic about selling its Asian life-insurance unit, American International Assurance (“AIA”) for the past several quarters to UK giant Prudential plc (PUK). But following the collapse of the deal, AIG now plans to go ahead with a $15 billion initial public offering (IPO) of its AIA unit, by seeking a listing of AIA on the Hong Kong Stock Exchange by the fourth quarter of 2010 at around $30 per share, subject to regulatory approvals and market conditions.

Besides AIG, Prudential plc and the Dutch financial services groups ING Group (ING) and AEGON NV (AEG) pulled out of Taiwan in 2009, while in April 2010, Metlife Inc. (MET) sold its insurance wing in Taiwan.

The failure to repay the bailout funds to the US government is frustrating for AIG, as the company is trying every means to repay its remaining $132 billion, out of the $182.3 billion provided at the peak of the economic meltdown.

We believe that AIG is putting in vigorous efforts to strengthen its business, manage costs, recover its investments and repay the bailout money. The planned divestitures will help AIG repay and free it of pay restrictions.

AMER INTL GRP (AIG): Free Stock Analysis Report

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