AIG's AIA IPO Raises $17.9 Billion - Analyst Blog

On the back of strong demand and good positioning in the market, the American International Group Inc. (AIG) has raised $17.9 billion, as the company vended off the 58.4% stake in its Asian life-insurance unit, American International Assurance Group Ltd. (AIA) by offering 7.03 billion shares priced at HKD19.68 ($2.53) each.

However, if the underwriters exercise the over-allotment option, the IPO size would rise 15% to $20.5 billion. Also, AIG is holding the remaining 41.6% stake that would drop to 33%, if it exercises an option to issue more shares. AIG is subject to a lock-in period of 6 months and must hold at least a 30% stake in AIA for a year, post-listing.

AIG plans to utilize the sale proceeds of AIA to repay some of the US government bailout loan, which it had taken at the time of the financial crisis. As of the end of June, AIG owed the US government more than $100 billion.

Currently, AIA is valued at $30.5 billion and its shares are expected to start trading on October 29 on the Hong Kong Stock Exchange. AIA has wholly-owned entities in China, Indonesia, Malaysia, Thailand and Vietnam and more than 300,000 agents in Asia.

AIG has forecasted operating pre-tax earnings of about $2 billion for AIA's fiscal 2010 ending this November. However, AIA is not expected to pay out dividends until the second half of 2011, as laid out in its prospectus.

Given its large market share and higher operating experience in the Asian region, we believe that the operating profit projection could eventually be achievable.

AIA went public after AIG's plans of disposing it to Britain's Prudential plc (PUK) for $35.5 billion in May was abandoned. The deal fell through as AIG declined accepting Prudential's lower offer of $30.4 billion.

AIG had also vended off its American life insurance unit, ALICO to MetLife Inc. (MET) for $15.5 billion (deal to be closed in November 2010) and it also agreed to sell off its two Japanese life assurance subsidiaries, AIG Star Life Insurance Co. and AIG Edison Insurance Co., to U.S.-based insurance group, Prudential Financial Inc.(PRU), for $4.8 billion.

AIG has been attempting to sell off its business in order to repay the bailout money and free itself from pay restrictions. These actions will also result in streamlining AIG's operations and the debt reduction will strengthen its balance sheet and ratings.

AIA IPO proceeds are also expected to increase the book value of AIG, given the capital gain from the sale. Going forward, we believe that AIG will now have to stand on its own feet once again, while maintaining ample liquidity and re-establishing itself in the industry. This is also important to restore shareholder confidence.

However, we continue to remain cautious of the large amount of intangible assets on AIG's balance sheet. Moreover, it also remains highly crucial for AIG to manage its already high debt, especially from the government bailout loan.