AIG's Nan Shan Deal Coming Soon? - Analyst Blog

Moving ahead with its rigorous restructuring program, on Thursday, American International Group Inc. (AIG) revealed its intentions of divesting its Nan Shan insurance unit in Taiwan in a couple of months, for about $2 billion, as reported by Reuters. The proceeds of the sale will be utilized to repay a part of the U.S. bailout loan.

Concurrently with its earnings release last week, AIG had intimated its intention of disposing of Nan Shan by the end of 2011. The latest newsflow narrows the previous time guideline, reflecting higher optimism on AIG's debt reduction.

Previously in June 2010, AIG made certain alterations to comply with China's government policies, in an attempt to perk up the divestment of its Nan Shan, which was decided to be sold for about $2.2 billion to a Hong Kong-led consortium, as on October 2009.

According to the modifications, AIG had agreed to set aside $325 million of the purchase price in an escrow account for a four-year period, which will be utilized from time to time to enhance and maintain Nan Shan's capital ratios. However, the parties to contract still await government's sanction on the deal.

The delay on the deal persisted ever since, whereby no news from the regulatory authorities came up. Besides, Taiwan's Investment Commission, which will have final say on the deal, had rejected the sale proposal of Nan Shan, in August 2010, to the interested parties, including Primus Financial, Fubon Financial and battery maker, China Strategic, thereby further delaying the sell off. However, AIG officials are said to be entering into negotiations with these parties once again in order to materialize the deal as soon as possible.

Despite the sound fundamentals of Nan Shan, which enjoys the third largest position as per market share in the Chinese insurance market with more than 4 million policy holders, regulatory authorities overall appear to be concerned about vending Nan Shan to Primus and China Strategic. Their apprehension is based on both the acquiring companies' inadequate experience to take over such a high profile business, initiating scepticism on their efficiency. These lingering thoughts appear to delay the proposed deal.

On the other hand, management of AIG has been considering exiting Taiwan since last year, after the global economic breakdown created an unprofitable investment environment and posed further operating challenges in Taiwan. Moreover, AIG is not the first foreign investment company to exit Taiwan. Companies such as the ING Group (Dutch), Prudential Life (London),Aegon NV (AEG) (Dutch) are known to have pulled out their businesses from Taiwan in 2009, while in April 2010, MetLife Inc. (MET) sold off its insurance wing in Taiwan.

Alongside, after the successful IPO of AIG's AIA, disposition of other assets such ALICO to MetLife, Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) and AGF to Fortress Investment Group LLC (FIG), going forward, management is also eyeing an IPO for its airplanes leasing unit, ILFC, apart from other growth alternatives to improve and stabilize this unit.

AIG has been working for the past several quarters to sell its unnecessary businesses in an effort to repay the bailout money. However, although we do not see any significant downside regarding this issue, the Taiwan deal remains uncertain because there is every possibility that the buyers might pull themselves out of the venture, should the government intervention poses further predicaments. Hence, we remain on the edge to assimilate further developments.