On Monday, global insurance giant American International Group Inc. (AIG - Analyst Report) signed a 10-year contract worth $55 million with Europe’s leading bank – HSBC Holdings Plc to sell its insurance products in the continent.
According to the bancassurance contract, AIG has been chosen by HSBC to be its primary seller of non-life products related to accident and health in France, Turkey and other countries of Continental Europe. Additionally, AIG will acquire HSBC Assurances IARD (HAI), which is HSBC’s French wing, for $14.5 million as per the agreement. This amount comprises $13.3 million as the deal amount, while another $1.2 million accounts for a contingent deferred payment that will be based on premiums written in 2013.
The alliance is expected to be operational in the first half of this year. However, the launch of the partnership is based on the successful culmination of the proposed HAI acquisition and receipt of customary approvals in Turkey and France. Alongside, HSBC has also approved to sell the life insurance and pension products of Allianz SE, who inked a 10-year contract with the former for about $30 million.
The strategic alliance with HSBC is another attempt by AIG to deepen its penetration in global locations. Particularly now that company has revamped its business portfolio to focus on core insurance operations, AIG aims to explore consumer and commercial insurance business opportunities internationally, so as to expand its scale of operations.
Moreover, Turkey and other countries in continental Europe showcase ample scope for permeation as these are amongst the rapidly developing global nations. Nonetheless, the contract also reflects AIG’s newly-achieved capital flexibility.
Ratings Validate AIG’s Growth Potential
Following AIG’s modest operating performance during the first nine months of 2012 and the complete bailout loan repayment, last week, ratings agency A.M. Best affirmed the credibility of the company and its operating divisions. The outlook remains stable.
Accordingly, A.M. Best maintained its issuer credit rating (ICR) of “bbb” on AIG and “a” on Chartis U.S. Insurance Group, Lexington Insurance Pool and American International Reinsurance Co. Ltd. (AIRCO). The financial strength rating (FSR) of these wings of AIG were retained at “A” (Excellent).
The ratings agency also reiterated the ICR of “bbb” and FSR of “A” for AIU Insurance Co. (AIUI) with a negative outlook. However, A.M. Best upgraded its outlook on the four US-based life and health companies of AIG to positive from stable, while affirming their ICR at “a” and FSR at “A”. These include the AIG Life and Retirement (SunAmerica) division of the company.
In January last year, A.M. Best had revised its outlook on Chartis and SunAmerica to stable from negative. Further, the revised positive outlook for SunAmerica is based on its improved risk-based capitalization along with its strong distribution network that enhances this division’s earnings potential.
SunAmerica has been generating strong statutory earnings over the past few years, which has helped it to maintain its liability equilibrium among spread, fee and mortality-based products. The company has also been maintaining leading market positions in its key product lines. However, risks related to SunAmerica’s investment profile along with its vulnerability to low interest rate environment and increased dividend payouts to AIG continue to mar the desired upside.
As of September 30, 2012, SunAmerica’s total investments in mortgage- and asset-backed securities, collateralized debt obligations and commercial mortgage-backed securities were approximately $34 billion, while exposure to alternative assets totaled $8.2 billion, thereby injecting optimum risk to the total adjusted capital, investment portfolio and spread-based businesses.
On the other hand, AIG’s Chartis leads the commercial lines insurance market with its wide-ranging products and services as well as pricing initiatives. However, a weak P&C cycle, unfavourable underwriting experience, increased claims and losses from catastrophes along with escalated reserve losses from prior years substantially hampered the growth of its risk-based capitalization in 2012. Nevertheless, A.M. Best expects rate increases in 2012 although underwriting is expected to be sluggish in the near term.
Overall, AIG’s unique operational focus and management discipline even amid a challenging economic and intensely competitive environment have helped its businesses regain composure sooner than expected. Going ahead, we expect the trend to continue as earnings are likely to be tempered by additional regulatory and operational challenges.
Any robust growth appears overly ambitious at present although a positive turnaround in the global economy and an improved macro scenario is likely to pave the way for significant growth of AIG, which currently a Zacks Rank #4 (Sell).