It took American International Group Inc. AIG +0.69% several attempts to get it right when it tried to sell off its flagship Asian life-insurance arm. Nailing its second attempt at selling off its Taiwan business may depend on whether regulators are willing to keep AIG's deal an all-local affair.

 

 

On Friday, three buyers submitted bids for AIG's Nan Shan Life Insurance Co.: Cathay Financial Holding Co., 2882.TW -0.65% Chinatrust Financial Holding Co., 2891.TW +0.59% and Ruentex Group, a conglomerate with interests in textiles and real estate. AIG has invited a fourth bidder, Fubon Financial Holding Co., 2881.TW +0.15% which hasn't yet disclosed whether it is in the race.

 

 

Now that AIG has successfully taken AIA Group Ltd. 1299.HK -1.33% public, raising $20.5 billion in a Hong Kong offering, there is less pressure to move quickly on Nan Shan, though the imperative remains the same. AIG needs to sell assets to pay back U.S. taxpayers for the insurance giant's 2008 bailout. With its previous effort to sell off the Taiwan business, AIG wasn't so careful and the result was a mess. AIG looked like it wrangled a good deal when it agreed to sell the unit for $2.15 billion, a price well above market expectations, to a consortium of two Hong Kong partners. But from the start, controversy dogged the buyers, private-equity firm Primus Financial Holdings Ltd. and China Strategic Holdings Ltd., 0235.HK +1.28% a shell company backed by some wealthy Hong Kong investors. Taiwan regulators finally rejected the sale in August.

 

You could misread that deal's death as a warning sign for overseas investors eyeing the Taiwan market to stay out. In much of Asia, financial services can be a tricky sector for foreign buyers, as Australia & New Zealand Banking Group Ltd. recently experienced. ANZ looked set to acquire a 51% stake in Korea Exchange Bank from Lone Star Funds but lost out late last month when an unexpected South Korean buyer, Hana Financial Group Inc., came in and sealed the deal for $4.1 billion.

 

In Nan Shan's case, being foreign hurt the buyers in one sense. Rumored connections to mainland Chinese backers, a sensitive issue in Taiwan and a possible violation of local law, stirred controversy. (Both Primus and China Strategic denied such connections.) Officially, Taiwan regulators cited doubts about the acquirer's financial strength and its commitment to Nan Shan when they lowered the ax.

 

But non-Chinese foreign insurers bidding for Nan Shan would be welcomed with open arms. Taiwanese officials, including the Financial Supervisory Commission, are eager to peddle the island's attractions at a time when mainland China lures away so much foreign investment.

 

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The Nan Shan Life Insurance Co. logo is displayed at the company's headquarters in Taipei, Taiwan, on Wednesday, Sept. 1, 2010.

 

"By far, the FSC's preference is a solid foreign buyer with insurance expertise," says Sam Radwan, managing partner of Enhance International LLC, a consultancy focused on insurance in Taiwan and mainland China.

 

Unfortunately for Taiwan, foreign insurers have headed in the opposite direction for some time, dumping local subsidiaries whenever possible. That's because the sector is saddled with old money-losing policies that offer guaranteed interest payments of 6% or more, the legacy of past heavy competition in the sector. With interest rates low, many insurers make less on their investments than they pay out on their old policies, a phenomenon known as "negative spread."

 

Local firms like Ruentex are attracted by the ability to invest in real estate through an insurer's portfolio, says Mr. Radwan, who also notes that Ruentex's owner previously made money investing in the insurance business. But they are unlikely to win the day. Less than two months ago, the FSC rejected plans by another small Taiwan player to buy the local unit of U.S. insurer MetLife Inc. MET +0.57% for $112.5 million, citing its lack of "professional abilities." Given AIG's experience, inviting yet another FSC rejection would be foolhardy.

 

AIG will therefore probably push for a local bank—Cathay Financial, Fubon or Chinatrust—as its best option. Where foreigners see liabilities, these banks, which all have insurance businesses, see assets. Nan Shan offers them heft and competitive advantage in a mature domestic financial-services market. Moreover, acquiring Nan Shan could also make it easier for them to take on the mainland Chinese insurance market, where prospects are more attractive.

 

Regulators might resist consolidation, given that two of the bidders, Cathay Financial and Fubon, already have "negative spread" issues. Future capital requirements could make that problem worse as Taiwan moves to adopt stricter standards, Mr. Radwan says.

 

Should regulators balk, AIG could look at taking Nan Shan public.

 

It worked with AIA, eventually. AIG first tried selling AIA directly to interested buyers but couldn't get the price it wanted. Then it worked on an IPO. Then it pulled the IPO after agreeing to sell AIA to Prudential PLC. But that deal went south when the British insurer haggled on the price. AIG reverted to taking AIA public, ultimately lucking out in October.

 

AIG no doubt wants similarly happy resolution for Nan Shan, but with one or two fewer twists along the way.