American International Group Inc. (AIG - Analyst Report) announced a joint venture (JV) with PICC Life Insurance Co. Ltd. (PICC Life) in collaboration with The People’s Insurance Co. of China Ltd. (PICC Group). The JV attempts to help AIG reach out to the second largest global economy of China.
Accordingly, the JV is based upon the condition that AIG will contribute $500 million by buying the H shares of PICC Group. This China-based insurance company is soon going public at the Hong Kong stock exchange through an initial public offering (IPO) that is projected to be worth $3.6 billion. PICC Group has subscribed about 50% of its shares to cornerstone investors and AIG. This company already holds a 9.9% stake in PICC Group’s PICC Property and Casualty Co. Ltd.
Moreover, AIG will retain at least 75% of the $500 million shares for 5 years post IPO. However, if the JV fails to be effective by May 2013, then the company will be free from any bond to retain shares.
PICC Group is the fourth-largest insurance company in China, and this particular feature enhances the growth prospective for AIG through this new JV. It will also boost the company’s distribution of life and other insurance products, thereby escalating growth opportunities in its core businesses.
The joint collaboration also complements AIG’s growth strategy of international expansion. Previously, the company had to abandon its pan-Asian unit – AIA Group Limited (AIA) – since the company had to liquidate in order to repay the $182.3 billion government bailout loan in the US. AIG now owns only about 13.7% in AIA.
Nevertheless, the risk of increased competition also remains a lingering concern, particularly with its own arm – AIA – and with the peer group including Prudential Financial Inc. (PRU - Analyst Report) and MetLife Inc. (MET - Analyst Report).
Hence, we remain on the periphery at the moment to analyse the managerial and financial developments at AIG and its wings going ahead. Consequently, we maintain a long-term Neutral outlook on AIG with Zacks Rank #3, which implies a short-term Hold rating and indicates no clear directional pressure on the stock in the near term.