AIG Views $2B Profit for AIA in '10 - Analyst Blog

Over the weekend, American International Group Inc. (AIG) estimated pre-tax earnings of about $2 billion for its Asian life-insurance unit, American International Assurance Group Ltd. (AIA), in fiscal 2010. This is notably higher than the $1.84 billion pre-tax operating profit earned by AIA in fiscal 2009, as reported by Prudential plc (PUK) in March 2010.

Background Story…

AIG started reorganizing for the initial public offering (IPO) of AIA in Hong Kong after Prudential refused to buy the unit for about $35.5 billion in May 2010. After facing several hurdles and rejections, AIG finally acquired preliminary approval from the Hong Kong exchange last week to list AIA share trading from October 29, 2010 onwards.

Since then, AIG has started to estimate its investor demand, expecting to raise about US$15 billion from the AIA’s IPO. The AIA fundraiser is expected to be the second largest IPO in Hong Kong after the recent IPO of Agricultural Bank of China Ltd., which raised about $22 billion a couple of months back. AIG awaits the final approval of the listing committee, which is expected soon.

Funding and Risk-Retention in AIA…

Among other arrangements, AIG aims to lend out higher stake to cornerstone investors, which is also expected to add to the market’s confidence in the AIA IPO, since such investors have a lock-in period of 6-12 months on their investments. Hence, AIG is negotiating with several Middle Eastern and Asian sovereign funds in order to sell these special stakes in AIA, making AIA’s listing process plausible by all means. AIG is itself subject to a lock-in period of 6 months and must hold at least a 30% stake in AIA for a year, post the listing.

Eleven book-runners have been appointed for the AIA IPO, including Barclays plc (BCS), Bank of America Corp.’s (BAC) BofA Merill Lynch, UBS AG (UBS), Credit Suisse Group (CS) and JPMorgan Chase & Co. (JPM). Besides, the company has appointed Citigroup Inc. (C), Goldman Sachs Group (GS), Morgan Stanley (MS) and Deutsche Bank AG (DB) as the global coordinators as well as book-runners.

Viability of the Earnings Projection…

Given its large market share and higher operating experience in the Asian region, we believe that the operating profit projection could eventually be an achievable scenario. Further, the IPO is expected to make AIA well-capitalized, although the distribution and utilization of the funds raised is yet to gain clarity. Moreover, it also remains highly crucial for AIG to get AIA operated in the best of circumstances since AIG is already bears high debts, especially from the government bailout loan.

AIG is the only insurer left in the US who is yet to repay its bailout loan to the government. About 80% of AIG is still owned by the US government and hence the company is attempting to dispose assets in order to repay the remaining $132 billion.

AIG Views $2B Profit for AIA in ’10 – Analyst Blog

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