AIG To Fund Repurchase With AIA Sale

AIG (NYSE:AIG) has announced the sale of $2 billion of its stake in American International Insurance (AIA) Group Ltd. ^[1] The Hong Kong- based insurer was a subsidiary of AIG, but listed as an independent entity after the parent company was bailed out by the U.S. government in the depths of the 2008 financial crisis. The sale is part of the company’s strategy to sell off non-core units such as ALICO to fund a stock repurchase from the U.S. treasury department.

Our $35 valuation of the AIG’s stock is in-line with the current market price.

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The announcement regarding the sale came two days after the lock-up period, prohibiting such a transaction, expired. The 600 million shares on offer account for only a quarter of the $7.6 billion stake currently held by AIG, which is hoping to hold out a rise in shares and greater return via sale in the future. Further sales, however, will have to wait three months owing to the lock-up period.

The cash raised through the current sale will help AIG reduce the Treasury’s stake in the company, which once stood at 92% but has reduced to 52% through a series of sales. The company’s board has authorized a $5 billion plan for buyback from the Treasury, which would reduce the government’s stake to around 44%, thus qualifying it as a savings-and-loan holding company and reducing the regulations imposed by the authorities. ^[2]

Focus On P&C

AIG’s public image suffered a blow as it was forced to accept a $182.3 billion bailout from the U.S. government in 2008. This forced it to rename its biggest insurance unit, AIU Holdings LLC, to Chartis, in order to distinguish it from the parent company. The company has since undergone a renaissance, with strong performances in the last few quarters and has recovered its brand image to an extent that it is once again ready to use the name AIG for its property and casualty business. (See AIG Is Ready To Use Its Own Name Again For P&C Business)

AIG has been selling non-U.S. insurance units such as AIA to repay the treasury after the bailout. (See AIG Gets Into Fighting Shape By Selling Off Weak Units) Despite this strategy, the company has managed to increase penetration in emerging markets in Asia and Latin America. Almost half of AIG’s premiums last quarter were written outside the U.S., indicating increased focus on international growth.

Developing economies, particularly in Asia, offer high growth potential for insurance companies. Insurance premiums in emerging countries have grown at an annual rate of 11% in the last decade, compared to a meager 1.3% observed in developed countries. ^[3]

This trend has led a number of international insurance companies such as Prudential Financial (NYSE:PRU), Manulife (NYSE:MFC) and MetLife (NYSE:MET) to increase focus on these geographies, resulting in stiff competition. We expect AIG to leverage its redeemed reputation to come through the clash in the near future.

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1. AIG’s Buyback With AIA Share Sale Misses Analysts’ Mark , Bloomberg, 7^th September, 2012 [↩]
2. Savings and Loan Holding Company, Federal Reserve [↩]
3. Insurance in emerging markets: growth drivers and profitability, Swiss Re [↩]