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Earlier this week, American International Group Inc.’s (AIG - Analyst Report) Asian wing – AIA Group Limited (AIA) – announced its pact with Dutch Insurer – ING Groep NV (ING - Snapshot Report) –to acquire the latter’s insurance operation in Malaysia. The deal is valued at €1.3 billion ($1.7 billion) and is expected to culminate by the first quarter of 2012, depending on receipt of regulatory approvals.
Armed with 1.6 million customers and 9,200 agents, ING Malaysia offers life, general, and Islamic insurance products across the south-east Asia. Hence, the acquisition will enable AIA to top the rapidly growing Malaysian market in terms of total premiums, raising the contribution of Malaysia in AIA’s new business to 10% from the present 6%. Going forward, insurers also anticipate life insurance premiums in Malaysia to grow by 5.5% next year as opposed to a globally projected rate of 3.7%.
Moreover, ING Malaysia is anticipated to be immediately accretive to AIA and is expected to add at least 5% to its earnings upon completion of the acquisition. On the other hand, ING is expected to earn about €780 million ($1 billion) from the transaction.
Meanwhile, AIA appointed Deutsche Bank AG (DB - Analyst Report), Morgan Stanley (MS - Analyst Report), Evercore Partners, CIMB and Debevoise & Plimpton LLP as its legal advisors, whereas ING took the advice of Goldman Sachs Group Inc. (GS - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) for the deal.
The latest acquisition also marks the second-biggest inorganic expansion by AIA in less than a month, when this pan-Asian insurer of AIG entered into a pact to buy British insurer – Aviva Plc’s operations in Sri Lanka for $109 million. This also indicates AIA’s strategic initiatives to strengthen its position in Asia.
While AIA is shoring up its Asian presence, ING is all set to divest its operations in Japan, Hong Kong, South Korea and Thailand in order to repay the bailout loan of about €10 billion ($12.9 billion) to the state that was received as a financial aid during the 2008 economic crisis. However, ING Malaysia is its first sale since the announcement of the divestment in January this year.
AIG had raised about $20.5 billion from the initial public offering (IPO) of AIA at the Hong Kong stock exchange in October 2010. In March this year, the company earned $5.6 billion from the sale of 1.7 billion shares or 13% stake in AIA, which left the former with about 19% ownership in the subsidiary. Last month, AIG raised another $2 billion from the sale of a part stake in AIA. At present the company owns 13.7% stake in the latter.
While the sale and the subsequent sanction of the stock buyback from the Treasury further contracts AIG’s debt portfolio, it also indicates that the company is under-utilizing its current capital flexibility and its potential liquidity position. Last month, AIG contracted the US Treasury’s ownership in the company to 15.9% from 92% as of January last year.
Conversely, the slow pace of AIA stake sale also point towards management’s anticipation of seeking a higher value for the growing AIA shares in the future. Thus far, the value of new businesses for AIA jumped to 22%, while the margin in new businesses surged to 42.6%, up 1100 basis points from the year-ago period, thereby reflecting accelerated growth.
Nevertheless, we remain on the periphery at the moment to analyse the managerial and financial developments at AIG and its wings going forward. Consequently, we maintain a long-term Neutral outlook on AIG with Zacks Rank #2, which implies a short-term Buy rating and indicates a slight upward pressure on the stock in the near term.