Yesterday, American International Group Inc. (AIG) announced its plans to shed off the remaining stake in its Asian life-insurance unit – American International Assurance Group Ltd. (AIA) – following the expiry of the lock-up period in September this year.
As part of its asset-divestment strategy to payout the US government bailout loan, AIG is mulling the sale of its remaining 18.6% ownership in AIA. Previously, AIG had raised about $20.5 billion from the initial public offering (IPO) of AIA at the Hong Kong stock exchange in October 2010, much higher than prior expectations of $15 billion.
However, AIG was then subject to a lock-up period of 6 months and was also required to hold at least a 30% stake in AIA for a year following the listing.
Nevertheless, AIG successfully vended off about two-third of its stake in its AIA during October 2010, primarily to cornerstone investors since such investors have a lock-in period of 6-12 months on their investments.
Subsequently, with the completion of the holding-period and modest market conditions, AIG divested another 13% in AIA in March this year. Accordingly, the company sold approximately 1.7 billion shares for over $6 billion. While AIG’s remaining ownership is presently estimated to be worth about $7.6 billion in AIA, the lock-in on the left over stake expires in September this year.
Overall, AIA has always been a feather in AIG’s cap and we expect the company to benefit from the good timing of the sale and AIA’s outstanding performance. The pan-Asian insurer grew by 40% in 2011 based on its strong demand, modest pricing and good positioning in the market. Being one among the top-three insurers, AIA is well positioned in the Hong Kong and related Asian markets based on its reputation of fair performance.
Additionally, the sale of remaining stake is also crucial for alleviating the volatility in AIG’s earnings due to the inclusion of AIA. Moreover, the proceeds from the sale of remaining stake in AIA will help AIG repay a part of the $182.3 billion government loan, which currently stands at $45 billion.
Going ahead, liberation from government loan and focus on core operations should not only improve AIG’s financial leverage but also enhance its operating and competitive leverage against arch-rivals such as MetLife Inc. (MET) and Prudential Financial Inc. (PRU). Currently, AIG carries Zacks Rank #3, which translates into a short-term Hold recommendation and long-term Neutral rating.
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