Ever since the financial crisis, American International Group (NYSE:AIG) has been shedding its non-core businesses, as well as other investments, in order to create a slimmer, more focused insurance company. Though the company has very little fat left to lose, it is taking yet another step in the right direction with the sale of its India-based asset-management operations to Canadian Brookfield Asset Management (NYSE:BAM). The deal might not seem significant initially, but upon closer inspection, investors can find a treasure trove of insight into the insurer's management team and its priorities.
First, the terms
For a current client of the Indian segment of AIG Global Real Estate's asset-managment business, very little will change. All of the accounts currently open will be transferred to Brookfield, with both the fund manager and employees following right behind.Though no financial terms of the deal have been disclosed, it's expected to close by the end of January.
AIG Global Real Estate manages $13.6 billion in real estate assets globally, but India has been a relatively small market. In fact, the deal is being completed because the operations have "no short-to-medium-term plans" in India. With only five investments totaling $200 million of the $300 million fund between 2007 and 2009, there has been little to gain for AIG GRE.
With an established presence in India, some may question why AIG would pull out of the fund completely. But if you look at the economic environment, you may see a different picture.
India is Asia's third-largest economy, but it has been plagued with high inflation, a weak currency, and declining foreign investment. The country had been enjoying a GDP growth rate of 8% for much of the past decade, but recent times have seen that rate slip to below 5%. The World Bank dropped its estimate of India's projected GDP growth for the next year to 4.7%. Though the projected growth rate in India is something we Americans might envy, international businesses can find better opportunities elsewhere.
Ni hao, China
Much like India, China has been experiencing a period of decreased GDP growth. But although it has dropped from the historical double-digit rates, the 7.8% annual growth is still healthier than in both India and the U.S. According to the Organisation for Economic Co-operation and Development, a global forum for governmental collaboration on economic issues, China will shortly surpass the eurozone economies and the U.S. economy in purchasing power.
With its capital freed up from the Indian operations, AIG can further its investments in China with the PICC Group, where it has focused sales of both life and retirement products, with the option to expand into property and casualty products. The exit from a lagging market in order to free up capital for more traditional uses highlights the top priority for AIG's management: focus on core insurance businesses.
One small step for Global Real Estate, one giant leap for AIG
With the corner office team clearly focused on distributing capital to the best-performing operations, by either exiting or selling sub-par investments and businesses, investors should feel confident that those at the helm of AIG are steering it in the right direction. It has taken the company five years to recuperate from the financial crisis, but the weakness of the past is leading straight on to strength in the future.