OMG, AIG! AIA? PICC? WTH?
Dec 20th 2012 3:57PM
Updated Dec 20th 2012 4:04PM
Insurance giant AIG seems to be taking the pay-it-forward mentality to heart. Just days after the U.S. government sold its remaining shares of the previously troubled company, AIG has done the same with its Chinese counterpart, AIA Group. But as American companies expand their Chinese exposure, investors are left asking: Why would AIG divest itself of the remaining AIA shares?
Long history, short ending
The AIG-AIA relationship spans more than 90 years, with the latter's business focusing on property and casualty coverage in 16 Asian markets. When AIG required a government bailout during the financial crisis, it was forced to divest a large portion of its AIA stake to raise repayment funds. Since 2010, AIG has continued to sell its AIA shares, with this last sale bringing its profits tally to approximately $35 billion .
As one of the leading P&C insurers around the globe, AIG's final sale of AIA brings up some interesting questions. Though the initial sales helped AIG repay bailout funds, this last sale was not driven by the same motives, since the government's ownership of AIG was closed out last week.
Not jumping ship
There's been a lot of uncertainty about China lately -- with rampant fraud and a slowing economy, many investors are wary of putting their money in Chinese stocks. But many American companies don't share the same weariness. In fact, Goldman Sachs' chairman of asset management, Jim O'Neill, believes that the Chinese economy will continue to grow at 7%-7.5% over the next five years. O'Neill predicts that China will be the best investment opportunity of the four biggest emerging markets: Brazil, Russia, India, and China -- or BRIC. The World Bank also predicts growth near 8% for China.
Within the past year, AIG and some of its U.S. compatriots have increased their Chinese investments:
- Though it relieved itself of AIA, the insurance giant invested $500 million in Chinese insurer P.I.C.C. Group's IPO in November, and it has also announced a life insurance joint venture with the group.
- JPMorgan pumped $400 million into its Chinese segment earlier this year to expand its bank branch network, extend more corporate lending, and add more employees.
- Likewise, Citigroup entered a joint venture with Shanghai-based Orient Securities in August. With 33.3% stake in the JV, Citi will be extending its M&A and underwriting arm into the Asian markets, with options to increase its holdings further.
Keep it simple, stupid
One possible reason for AIG's moves: simplification. With its remaining stake in AIA resting at 13.69% and a new venture into the Chinese life insurance market underway, it may have been the right time for AIG to focus its Chinese holdings. This is exactly the course that AIG's fellow U.S. financial institution, Bank of America , took recently when it sold off its Chinese and Japanese JVs to focus on its core businesses.
While it remains a worldwide leader in P&C insurance, AIG's latest sale indicates that the company wants to concentrate its Chinese segment on life insurance with the P.I.C.C. venture. With China's economic growth forecasted between 7%-8%, a growing and more affluent Chinese middle class creates an expanding market for life insurance. These policies provide a retirement investment for people who may not have other options, while also giving wealthier investors investment options like annuities.
With a new approach to its Chinese operations and the end of governmental ownership, AIG may have a new lease on life. Though American investors remain wary about AIG and China, the Fool recognizes the company as a potential investment opportunity. With its business changes and new potential as the Chinese economy continues to grow, our analysts developed a special assessment to help you determine whether AIG is a buy now. For instant access, click here.
The article OMG, AIG! AIA? PICC? WTH? originally appeared on Fool.com.Jessica Alling has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group, Bank of America, Citigroup, and JPMorgan Chase and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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