Earlier this week,
American International Group Inc.
) Asian wing - AIA Group Limited (AIA) - announced its pact with
Dutch Insurer -
ING Groep NV
) -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
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
Meanwhile, AIA appointed
Deutsche Bank AG
), Evercore Partners, CIMB and Debevoise & Plimpton LLP as its
legal advisors, whereas ING took the advice of
Goldman Sachs Group Inc.
JPMorgan Chase & Co.
) 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
AMER INTL GRP (AIG): Free Stock Analysis Report
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