AIG’s Future plans Include holding onto Tata AIG
Reports suggest that AIG are likely to continue to hold on to their stake in its Indian insurance joint venture with Tata & Sons. Tata AIG is the name of the joint venture in life and general insurance which would require a further US$ 15 Million Rs. 69 Crore equity commitment from AIG over the next two years. It is highly unlikely that AIG will not be able to meet such a small commitment given the size of its balance sheet. Doing so would ensure it had exposure to one of the fastest growing economies globally with a population of over 1 Billion.
AIG plans on selling off its US life insurance business and some of its international life insurance operations so that it is can pay off the US$ 85 Billion Rs 391,000 Crore loan from the Federal Reserve. AIG will likely sell of its life insurance and annuities business in the US, Europe, Latin America and Japan
Traditional Insurer Selling of the Jewels
AIG intends to become a more traditional property and casualty general insurer with a global reach after selling off some of its life insurance businesses. It plans to maintain a stake in a unit that sells life insurance in fast growing emerging markets such as China, Korea and also owns the stake in the Indian joint venture and its Thai unit.
AIG announced on Wednesday that it was exiting the Philippines altogether. Philippine American Life and General Insurance, or Philamlife, the country’s biggest insurer, said AIG expects to sell the unit and has already received bids from 10 local and foreign investors.
Edward Liddy, CEO of American International Group said in a conference call that AIG may well sell its highly profitable plane leasing unit, its consumer finance division, its US auto insurer, a reinsurance business and an asset management division.
The decision to sell some of AIG’s life insurance companies represents a back track on the original strategy outlined by Liddy, who had initially commented that keeping that part of the business should be a priority. AIG has already drawn down over US$ 61 Billion, Rs 280,600 Crore of its credit facility offered by the US government which effectively gives the Federal Government a stake in the company.
Liddy has indicated that he would prefer large brand name buyers to purchase the business he has put on the block to aid with the speed of the transactions and to ensure there is continuity amongst the company’s employees and clients.
Asset Price Deflation
The issue AIG will face is that given current market conditions and the slide in equity markets worldwide, it is unclear whether the companies that are being put up for sale will be able to attract a decent enough price to ensure a transaction.
AIG’s strategy is to become a much more traditional property and casualty company. The trouble with this however, is if it is unable to divest the assets and business’s it now wishes to exit, due to the low price that AIG may receive for those business’s or assets in the short term, then it may have trouble paying of its loan to the US Federal Government.
AIG also plans to sell its holdings in asset manager The Blackstone Group, the world’s largest buyout manager. AIG spent $150 million Rs 690 Crore in 1998 for a 7 percent stake in Blackstone, which went public last year. The insurer recorded a $398 million Rs 1830 Crore gain last year from selling Blackstone shares.
Wants To Stay Strong In Asia
AIG wants to keep a majority stake in its American International Assurance Co. life insurance unit, Liddy said. That business operates in fast-growing markets including China, Singapore, Malaysia, Thailand, Korea, Vietnam and Indonesia. AIG has a joint venture for both Life and General Insurance, with India’s Tata group for which it would cost very little to maintain its status as a minority partner. AIG previously projected annual earnings growth from life insurance of more than 20 percent in developing countries. It comes as no surprise that it wishes to hold on to these assets.
Whilst on a conference call, Liddy was quoted as saying “the businesses we are retaining could not be re-created today.” The U.S. business may sell for about $25 billion Rs 115,000 Crore whilst the overseas life insurance division, including parts that will be kept, is worth about $62 billion Rs 285,200 Crore according to Bloomberg who cited a Credit Suisse analysts report for their story. AIG’s property-casualty units took in $40 billion Rs 184,400 Crore in revenue last year, the company said.
The values that we will receive from the assets we intend to dispose will be more than enough to repay the Fed facility,” said Liddy,
Near Collapse
AIG almost collapsed last month from credit downgrades and write-down’s tied to the U.S. housing slump. The insurer posted about $18.5 billion Rs 85,100 Crore in net losses over three quarters, and its stock plunged more than 90 percent this year. AIG’s property and casualty units insure planes, shipping, factories and luxury homes and protect commercial property owners against terrorist attacks. The insurer may also unwind private equity investments; AIG had private equity and hedge fund holdings of about US$30 billion Rs 138,000 Crore as of June 30.
The company also owns a home lender and reinsurer Transatlantic Holdings Inc. AIG got 4.3 percent of its revenue last year from airline leasing. Second-quarter operating income from the unit rose 85 percent to $352 million Rs 1,619 Crore as the company expanded its fleet and charged more to rent planes.
The insurer may sell AIG Investments, which managed $758.2 billion as of June, and arrange for the new owner to oversee some of AIG’s holdings, Liddy said. The unit handles investments that back customer policies, plus $137.1 billion in client money.
AIG has two years to repay the U.S. loan. The insurer agreed to payments for borrowed amounts of 8.5 percent plus the 3-month London interbank offered rate. On the unused balance, AIG will pay 8.5 percent. Three-month Libor rose today to 4.33 percent from 2.88 percent the day the deal was announced. The company said the U.S. will get preferred stock worth 79.9 percent of AIG.
The $1 trillion-asset company has about $48.7 billion in hard-to-value holdings, and had 116,000 employees as of Dec. 31, compared with 97,000 two years earlier. In addition to selling life insurance and protecting property, AIG owns or manages about $25.7 billion of real estate including residential, industrial and retail properties.
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