(Corrects to show Clarkson is from S&P in paragraphs 4 and 22, not Fitch)
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By Michael Flaherty
HONG KONG, Jan 23 (Reuters) - In a downward spiraling Asian market, American International Group’s (AIG.N) sale of a minority stake in its more than $20 billion life insurance business faces an uphill climb.
Hong Kong-based American International Assurance Company Ltd. (AIA) has a long history in the region, particularly in China, and has dominant market share in several, fast-growing countries. That’s an enticing prospect for any buyer bullish about not just the company’s future, but Asia broadly.
But several challenges await the process, including falling demand across the insurance industry, lack of funding for buyers, and short-term economic outlook that is anything but bright.
“It’s true that it’s tough times at the moment,” said Standard and Poor’s director Paul Clarkson, who covers insurance companies. “The life insurance industry is facing the same problems as elsewhere. Investment linked products are gone at the moment. Bank assurance has dried up. New business is down.”
The plans to sell up to 49 percent of AIA were put in place last fall, shortly after the U.S. government saved AIG from bankruptcy in September with a rescue plan that has since ballooned to about $152 billion. Reuters reported in October that Citigroup and Goldman Sachs were advising AIG on its Asia sales.
The formal AIA auction is set to begin in the next few weeks, sources with direct knowledge of the matter say.
According to investment bankers close to the process, several suitors have emerged for bits and pieces of AIG’s various units across Asia. That’s flattering, but the main focus for AIG and its advisers is to sell large chunks of its assets, seeing as it owes a lot of money to the U.S. government.
So the question remains--What buyer can afford the roughly $10 billion it would cost to buy up to 49 percent of AIA?
“The divestment is being conducted in a smart, disciplined and competitive process. There is no intention to sell AIA on a piecemeal basis,” said AIG spokeswoman Patricia Chua. “We are tracking our timetable.”
AIG Chief Executive Edward Liddy said at a Hong Kong press conference last month that he expected to meet with potential Asian buyers in January.
The list of potential suitors looks thinner since October.
India’s cashed up conglomerates once appeared to be a good fit, but that market has plunged in the last few months, and bank funding for deals has pinched the country’s outbound M&A plans.
Reuters last November reported that China Life Insurance (601628.SS), the world’s biggest life insurer by market value at the time, was interested in buying Asian assets on sale by AIG.
But whether the Chinese government would bless a bid remains unclear. Reuters reported the following month that Wu Dingfu, chairman of the China Insurance Regulatory Commission, said that Chinese insurers should focus on supporting efforts to stimulate the domestic economy, not on overseas acquisitions.
Given that stance toward insurance companies, its safe to assume the same goes for its banks, which would preclude Industrial and Commercial Bank of China. ICBC (601398.SS), China’s largest bank, has said it plans to expand into insurance.
Prudential Financial (PRU.N) has a presence in Asia, but the question goes back to affordability. Its total market capitalisation is $10 billion.
Sovereign wealth funds are frequently mentioned as potential bidders. Private equity firms could get involved too, bankers say, but borrowing money for such a deal would be nearly impossible now. The most likely bet for private equity would be to put a few hundred million into a consortium of bidders.
“A consortium is the most likely scenario, with sovereign wealth funds and private equity,” said a source involved with the deal, who was not authorised to speak on the record.
The tough M&A climate should not cloud the fact that AIA is seen as a star in AIG’s portfolio, bankers and analysts say.
“They do hold very good market positions and they also have a good operation in China,” said S&P’s Clarkson, who mentioned Thailand, Singapore and Hong Kong as other markets where AIA is strong.
AIA has more than 2 million policies in force, according to its website, with branches and affiliates in most major countries throughout Asia outside of Japan. It has 3,800 financial services consultants and 800 staff.
Given that strength, there is the possibility that if a buyer does not offer the right price, AIA could put the process on hold.
“They’re going to do what’s best for shareholder value. They won’t take a lousy offer,” said another source who was also not authorised to speak on the record.
Nobody wants to sell a prized asset on the cheap. But then again, when you owe the U.S. government a hefty sum, sellers may not easily be choosers.
Reporting by Michael Flaherty, Editing by Anshuman Daga