Taiwan regulators reject AIG's sale of insurance unit to Primus

Taiwan regulators yesterday rejected American International Group’s sale of its Taiwan life insurance business to a consortium led by Primus Financial Holdings, throwing yet another spanner in the works for AIG as it strives to repay the bailout money it received from the US government in 2008.

The decision comes after more than 10 months of negotiations with Taiwan’s Financial Supervisory Commission and numerous concessions both by the buyer and the seller to get the deal approved and, in light of that, sources say the parties believed the $2.15 billion acquisition would eventually get the go-ahead.

The FSC didn’t offer any explanation for the rejection, which was announced through a brief statement in Chinese on its website as well as at a media briefing in Taipei in the late afternoon yesterday, but said it would like to see AIG keep the unit, which operates under the name of Nan Shan Life Insurance. However, the fact that the buyers had addressed all the concerns expressed by the regulators, and demonstrated, by various means, a long-term commitment to Nan Shan, suggests that it may ultimately have been a political decision.

Primus and its partner, Hong Kong-listed investment company China Strategic, were declared the buyers of Nan Shan in October last year following a competitive auction. Primus owns 20% of the winning consortium while China Strategic owns the remaining 80%.

In a response issued yesterday evening, AIG said it was disappointed by the decision.

“AIG has collaborated with the Taiwanese regulatory authorities from the outset of the sale process, and, in addition to meeting the criteria determined by the Investment Commission and other regulators, AIG believes that its additional accommodations of regulatory requests, including a seven-year lockup mechanism agreed to by the Primus consortium and a $325 million escrow agreement agreed to by AIG, demonstrate clear support for the Nan Shan capital structure and an incontrovertible commitment to the long-term health and prosperity of Nan Shan,” the US-based firm said.

The FSC’s decision can be appealed within 30 days, although it was unclear last night whether either of the parties would be interested in doing so. Clearly they have already put a lot of effort into this deal, and it is hard to see what else they could do to make the regulators change their ruling.

AIG said it will meet with the Nan Shan board of directors and senior management in the coming days to determine how best to proceed and added that it is also conferring with the Primus consortium as to whether to appeal the decision. AIG was advised on the sale by Morgan Stanley and Blackstone Advisory Partners.

Primus, a private equity-backed and Asia-based financial services holding company that was launched last year by former Citi banker Robert Morse and two ex-colleagues of his, chose to make no comment yesterday. And Deutsche Bank, which is acting as its financial adviser, also remained silent.

The FSC, which said during the sales process that it would prefer buyers that teamed up with a local partner, had reportedly expressed a series of concerns about the chosen buyers. The most serious and widely cited related to a belief that China Strategic may be backed by Chinese money. This is a politically sensitive issue in Taiwan, which separated from mainland China in 1949, and to this day, Chinese investors aren’t allowed to buy control of Taiwanese financial companies. Primus and China Strategic have repeatedly denied any links to China, but haven’t publicly disclosed where their financing comes from.

However, in June, China Strategic’s CEO, Raymond Or, quit his post on China's top political advisory body to avoid any further delays of the bid. The move seemingly didn’t help, as the Taipei city government in early July banned Or and three other board members from serving on the Primus consortium’s board after they had failed to clarify whether they hold Chinese citizenships.

A second concern centred on the fact that the consortium didn’t have any direct experience in running an insurance company; after all, China Strategic’s main business line is manufacturing and trading of battery products and related accessories, while Primus was formed only last year and has yet to establish a track record of successful investments. Nan Shan is the largest life insurance company in Taiwan by book value and has more than 4 million customers and 37,000 agents.

The buyers addressed this through a series of unprecedented measures, including the earlier mentioned lockup of 70% of their Nan Shan shares for seven years and the escrow arrangement agreed to by AIG, which would allow the owners to tap into the $325 million in escrow if Nan Shan’s risk-based capital ratio were to fall below the required 200%.

According to sources, they also addressed concerns about pension issues, agreed to maintain the agency system, and offered sizeable incentive payments to agents and staff. As a result, there was a lot of support within Nan Shan for the transaction and supposedly there had been some 24,000 support letters submitted to the regulators in favour of the deal.

And the buyers aren’t totally without experience in the insurance sector. Morse’s fellow co-CEO at Primus, Wing-Fai Ng, has a background with Taiwanese financial conglomerate Fubon Financial, where he was in charge of the group’s overall strategy, as well as M&A activities and all major change programmes related to the bank, the securities firm and the insurance divisions.

A few weeks after the initial acquisition agreement, Primus and China Strategic also struck a deal to sell 30% of Nan Shan to Chinatrust Financial Holding Company, which owns and operates Taiwan’s largest bank, for $660 million, supposedly to appease the regulators with regard to the local partner issue. However, as the approval dragged out – the deal with Chinatrust was conditional upon the Primus-led consortium getting regulatory approval for the Nan Shan acquisition – Chinatrust chose not to renew its purchase agreement when it expired at the end of June.

Initially a bidder for Nan Shan itself, it remains to be seen if Chinatrust will take advantage of Primus’s misfortune and table a new bid on its own.

Primus was set up last year with the aim of acquiring and growing financial services companies in the insurance, brokerage, advisory, banking and wealth management industries. The firm’s long-term goal with the acquisition of the AIG unit was on the one hand to make Taiwan a financial centre and on the other to grow Nan Shan outside of Taiwan.

In April this year, Primus agreed to buy a controlling stake in US-based inter-dealer broker Chapdelaine & Co.

For AIG, the rejection in Taiwan marks the second blow in short succession to its efforts to repay the $182.3 billion it received from the government in 2008 by selling Asian assets. In June, Prudential called off the planned $35.5 billion acquisition of AIG’s Asian life insurance business, AIA Group, after AIG declined to lower the purchase price. AIA has since resumed plans for an initial public offering and is expected to list in Hong Kong later this year.

This latest setback had little impact on the share price, however. AIG fell just 0.2% to $33.93 in US trading overnight, and clawed back all of those losses in after-hours trading. The Dow Jones index finished virtually flat.