Chinatrust Financial Holding Company, the biggest credit card issuer of Taiwan , said on Tuesday that it will buy a 30% stake in American International Group Inc.’s (AIG) Taiwan life insurance unit, Nan Shan Life Insurance Company, for $660 million from Hong Kong-based China Strategic Holdings. 

On Oct 12, 2009, AIG announced the sale of its 98% stake in Nan Shan to an investor group consisting of China Strategic and Hong Kong-based Primus Financial for about $2.15 billion. This amount was lower than Chinatrust’s bid but, Chinatrust lost its bid to buy the business. As a result, Chinatrust was considering legal action against AIG. 

In exchange for the Nan Shan deal, China Strategic would take a 9.95% Chinatrust stake, worth about 20.8 billion New Taiwan dollars ($647 million). According to Chinatrust management, the transaction will combine Chinatrust’s distribution network and Nan Shan ’s customer base to boost its competitiveness. 

The deal is expected to be completed by the second quarter of 2010. We view this divestiture as a key step by AIG to raise cash after the U.S. government rescued the company from collapse by providing $182.5 billion in exchange for 80% ownership last year.
 
In July 2009, AIG completed the sale of 21st Century Insurance Group, part of its personal auto insurance division, to Farmers Group Inc. for $1.9 billion.
AIG is the leading U.S.-based international insurance and financial services organization and among the largest writers of commercial, industrial, and life coverage in the U.S. 

The company’s business and investment portfolio are more exposed to sub-prime than other P&C insurers, and earnings depend more on partnership income. We expect AIG to report additional unrealized market valuation losses and impairment charges in the upcoming quarters as the market turmoil is expected to persist for a while.
 


Though AIG has been able to head off collapse by enlisting government support, it continues to face significant threat to its business model, customer base and distribution network as a result of the ongoing financial crisis. We are also concerned about the company’s significant exposure to residential and commercial mortgage backed securities.
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