Prudential Buys AIG Units – Analyst Blog

Talks between Prudential and AIG over the sale of its operations − AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. − had started last year but broke off after the latter’s chief executive commented that they would retain the companies and would operate and expand them.

Japan provides the maximum revenues to Prudential outside the U.S., contributing approximately 40%. The company has been operating in the country for over a couple of decades and has made three acquisitions − Orico Life Insurance and Kyoei Life Insurance Co., Ltd. in 2001 and Yamato Life Insurance Co. in 2009. Japan, which has a high rate of both longevity and savings, is an attractive region for retirement products.

The purchase of AIG’s Japanese units will consolidate the already strong footprint of Prudential in the country, providing it a significant competitive advantage in the Asian region. Moreover, with excess capital of $2.5 billion on hand, the company is uniquely poised for organic business growth and acquisition opportunities. Prudential will issue $1.3 billion in equity to fund the transaction. The company expects integration expenses of $500 million for five years along with annual savings of $250 million.

 
Impact on AIG

The proceeds generated from the sale of its twin life insurance business in Japan will help AIG repay a part of the more than $90 billion of government bailout money that is still left. Since September 2008, AIG has marketed its assets to pay off government loans of $182.5 billion it had received as a lifeline. Earlier during March 2010, AIG sold its American Life Insurance Co. (“ALICO”) which included the sale of a Japanese unit to MetLife (MET) for $15.5 billion. Also, during March 2010, AIG completed the $500 million sale of a portion of its asset management business, PineBridge Investments, to the Asia-based Pacific Century Group.

AIG’s profit and loss accounts will reflect a charge of $1.2 billion related to the sale. With this sale, the only presence of AIG in the life insurance market in Japan, with a 55% stake in a local insurance company, Fuji Kasai.

Following the announcement of acquisition, the rating agency Standard and Poor’s affirmed “A” and “A-1” ratings on the company’s long-term and short-term counterparty ratings, respectively. The “AA-” financial strength rating (FSR) on its core insurance subsidiaries were also affirmed. All the ratings carry a stable outlook.  

Also, Fitch Ratings affirmed its “BBB+” issuer default and “BBB” senior debt ratings, in the belief that the acquisition will further solidify the company’s existing footprint in Japan.

A.M. Best also has left its FSR of “A+” and issuer credit ratings (ICR) of “aa-” of its domestic life/health insurance companies unchanged.