On Monday, global insurance giant
American International Group Inc.
) 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
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
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).
AMER INTL GRP (AIG): Free Stock Analysis
HSBC HOLDINGS (HBC): Free Stock Analysis
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