Chinatrust planning to drop AIG unit bid

A Chinatrust Financial Holding Co- led group may drop out of the running for American International Group Inc’s Taiwan unit because of disagreements over the value of the business, two people familiar with the matter said.

Chinatrust, Bain Capital LLC and Oaktree Capital Management LLC have yet to agree on a bid because they are unable to assess the amount of capital the unit, which AIG wants to sell for at least $2 billion, needs in coming years, the people said, asking not to be identified because the talks are private.

The buyout funds are also concerned the unit won’t post a profit for at least three years, they said. 

AIG’s Taiwan unit Nan Shan Life Insurance Co is burdened with guaranteed-return policies that were sold in the 1990s when interest rates were higher, and faces increased competition. Private equity investors typically sell out of companies they invest in after three to five years.

 “The historical problems of Nan Shan might take years to digest and this poses lots of uncertainty on the timing of an exit,” said Calvin Choi, associate director in the corporate finance unit at PricewaterhouseCoopers LLP in Hong Kong. “It won’t be a surprise to see more potential investors drop out, and the ultimate transaction value will definitely be at a deep discount to AIG’s expectation.”

AIG is selling Nan Shan, the second-biggest life insurer in Taiwan, as part of a global asset disposal to repay $182.5 billion of debt owed to the US government.

The New York-based insurer has disclosed agreements to divest assets for about $9.3 billion since the September rescue.

Daniel Wu, a Taipei-based spokesman at Chinatrust, declined to comment, as did officials at Bain and Oaktree. April Pan, a Nan Shan spokeswoman, declined to comment on the sale.

The Chinatrust group is still in discussions, though the probability of submitting a bid is low, the people said. The group may submit a “low-ball, non-binding” offer at the end of this month, one of the people said.

Morgan Stanley’s private equity fund pulled out of the Chinatrust-led group on concerns of a perceived conflict of interest with Morgan Stanley’s advisory role for AIG, and funding costs, a person familiar said this week.

The AIG unit and other Taiwanese insurers sold policies before 2000 with guaranteed returns of at least 6.25 per cent, said Andy Chang, a director at Taiwan Ratings, the local partner of Standard & Poor’s. Traditional policies sold now typically carry returns of about 2 per cent, he said.

The so-called “negative spread” has contributed to a negative or zero embedded value for Nan Shan, one of the people said.

Buyout firms and other corporate bidders are expected to contribute additional capital to help Nan Shan cover the legacy policies, the people said. Embedded value estimates an insurer’s net worth excluding new business.

Morgan Stanley and Blackstone Group LP, AIG’s advisers, have asked potential buyers to submit a legal binding offer due August 28, two people said earlier. The sale arrangers have also asked private equity firms to team up with local Taiwan bidders to sooth regulatory concerns, they said.

Nan Shan has 4 million policyholders and an 11 per cent market share in terms of premiums. It raised $1.45 billion in a rights offer last year to avoid slipping below a regulatory capital requirement. AIG owns 97.57 per cent of the unit and Nan Shan’s management holds the rest.

Carlyle Group partnered with Fubon Financial Holding Co, Taiwan’s second-largest listed financial-services company, people familiar said earlier. Cathay Financial Holding Co, Taiwan’s largest publicly traded financial-services company, is bidding on its own, they said.

China Strategic Holdings Ltd said on July 31 it joined Primus Financial Holdings Ltd in a bid for an insurance company in Greater China.