AIG’s Asia Divestitures Face Capital, Regulatory Complications
Copyright: | A.M. Best Company, Inc. |
Source: | BestWire Services |
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The divestiture of American International Group Inc.'s [058702] life insurance assets in Asia face stresses related to funding sources, regulatory reviews and business integration before the transactions are completed.
Buyers' capital position and cash flow to fund the deals are among key concerns, said Arthur Hau, associate professor in the finance and insurance department at Lingnan University.
Raising capital is not easy, even though interest rates are still low. An interest rate hike, inflationary pressure and Europe's unstable economic outlook are factors pressing on capital markets, said Hau.
Acquisition Capital
AIG is selling AIA Group and American Life Insurance Co. [006081] to Prudential plc [085925] and MetLife Inc. [058175] for US$35.5 billion and US$15.5 billion, respectively.
MetLife should be in an adequate capital position to fund the Alico acquisition, given the group's "stable and steady" business performance, said Hau. MetLife has not taken an aggressive growth strategy and its focus has always been on its core business. In the past two years, the financial crisis did not have a big impact on the group.
MetLife will pay about US$6.8 billion in cash and the rest in equity securities of MetLife for Alico, subject to closing adjustments.
There is not much credit risk for MetLife in the Alico deal, said Hau. He added MetLife could gain a good return on equity of about 8% from the purchase of Alico, which generated US$1.3 billion in operating income last year.
Hau said Prudential faces certain investment risk because overall economic conditions in the United Kingdom is not that good.
Prudential plans to pay US$25 billion in cash and US$10.4 billion in new Prudential shares and other securities for the AIA acquisition.
To raise the cash, Prudential is planning a right issues of US$20 billion and the sale of senior debt for US$5 billion. Separately, the U.K.-based insurance group said it is seeking fast-track approval from the Hong Kong Stock Exchange to list its ordinary shares (BestWire, March 9, 2010).
Prudential has to convince its shareholders to back the US$20 billion rights offer. Timing is critical in view of potential interest rate hikes and unstable market conditions. Hau said it's better for Prudential to raise the acquisition funds by the end of this year or there would be higher investment risk.
"Prudential has an uphill struggle to convince existing shareholders of the benefits of paying what appears to be a very full price," said Barrie Cornes, an analyst at Panmure Gordon & Co., an institutional stockbroker and investment banker in London.
AIA is "a one-off opportunistic deal" and was always going to be expensive, but Cornes said "the question is can Prudential make it work." While the deal is a unique and transformational opportunity, Prudential has to convince it has value for shareholders.
There is a valuation gap that "requires a leap of faith that AIA grows and further cost savings are made to justify buying the shares," said Cornes in a report.
The key risks associated with the AIA deal "are those associated with overpaying, AIA's performance post-acquisition following a disappointing 2009 and the deal getting interrupted by an external party," said Cornes.
In the long term, Cornes said the deal "may well be positive for shareholders," but in the short to medium term, there are some "very real risks." The deal would give Prudential a greater presence in Asia, particularly the high-growth Southeast Asian economies.
AIA posted good profit margins in Asia, and the deal should be worth the money for Prudential, said Hau. Prudential would immediately raise its market share in Asia through the acquisition, particular in markets like Hong Kong and Singapore. If this would not cause any cash flow issues, Hau noted the deal would be fine for Prudential in the long run.
The new structure after the transaction would be the holding company for both Prudential and AIA. The proposed initial public offering in Hong Kong should enable Prudential to gain access to Asian capital markets, noted Cornes.
In Asia, the IPO of Prudential may be more attractive than that of AIA. AIA has a lot of operations in Asia and this would make the IPO process more complex. Prior to the deal, Hau said AIA's IPO timetable should have put pressure on AIG because any delay would make it prone to risk of interest rate hikes and tumbling in equity market.
The AIA deal came a bit too early for Prudential, but the AIA IPO process had forced the issue, said Cornes in his report. Ideally, Prudential "might have preferred to have divested its U.K. life business to create a war chest and possibly even have listed in Hong Kong to smooth the waters ahead of a large transaction," he added.
The deal is expected to be completed in the third quarter of this year. "Some 30 or so banks have agreed to join the syndicate for the rights issue, including sovereign wealth funds in Singapore and Qatar," said Cornes.
Regulatory Concerns
AIG had planned to list AIA and Alico on the stock exchanges in Hong Kong and New York, respectively. The listing plans were shelved with the divestiture of these two life units in March.
Domestic political pressure may be one trigger for the sales as AIG had not gotten far in selling its assets, particularly the profitable life insurance assets, to repay the U.S. federal government's bailout funds, according to Hau.
In Asia, the divestitures AIA, Alico and Taiwan's Nan Shan Life Insurance Co. Ltd. [086003] are still subject to regulatory approval, and there is a certain level of regulatory concern in Asia, said Hau.
That concern applies more to markets such as China, India and Taiwan. The Southeast Asian countries should not have much an issue as these markets move fast and they are open in their regulatory approaches, said Hau.
The pending sale of AIG's Taiwan life unit, Nan Shan, to a Hong Kong-based consortium for US$2.15 billion has made little progress after the deal was announced half a year ago. Hau said it is hard to anticipate the regulatory outcome in Taiwan. Nan Shan's business value has been shrinking due to its uncertain future.
Taiwan's regulator, the Financial Supervisory Commission, has outlined five conditions in its review of the Nan Shan deal. These conditions include that buyers' funding sources meet Taiwan's regulations and buyers have the ability to raise funds for future business needs. The buyers must have experience in insurance business and must give a long-term commitment to Nan Shan.
Hau noted Nan Shan's buyers, a consortium led by newly established Primus Financial Holdings Ltd. and Hong Kong-listed China Strategy Holding Ltd., have not had any experience in insurance, nor has their management team.
In China, regulations restrict a single insurance group from having controlling interests in more than one insurer operating in the same business line. Recently, China Taiping Insurance Holdings Co. Ltd. [051286] planned to sell its 100% stake in Ming An Insurance Co. (China) Ltd. [088856] to an unnamed third party due to this limitation (BestWire, March 17, 2010).
Also, ING Groep N.V. [085144] reached an agreement with China Construction Bank to sell its 50% stake in Shanghai-based Pacific Antai Life Insurance Co. to CCB, while it will focus on the growth of Dalian-based ING Capital Life Insurance Co., another 50-50 life venture with Beijing Capital Group (BestWire, Jan. 5, 2010).
Prudential may be able to sell parts of AIA to partly offset the US$35.5 billion acquisition price, said Cornes. Operations in China and India might be "the most obvious candidates" due to regulatory ownership limits, although there is still no indication of such sales currently, he added.
In India, ICICI Prudential Life Insurance Co. Ltd. [089580], Prudential's joint venture with private lender ICICI Bank, is the largest private life insurer with life premiums of 154 billion rupees (US$3.4 billion) in the 2009 fiscal year. Tata AIG Life Insurance Co. Ltd. [090169], AIG's life venture with the Tata Group, reported life premiums of 27.3 billion rupees in 2009, according to the Insurance Regulatory and Development Authority.
In China, AIA China and CITIC Prudential Life Insurance Co. Ltd. [090022] were among the top three foreign life insurers with life premium income of 8.04 billion yuan (US$1.2 billion) and 4.02 billion yuan, respectively, for 2009, according to the China Insurance Regulatory Commission.
Business Integration
Asia's diverse operational environments would make business integration more complicated compared to other regions.
Corporate integration would happen more in the arena of operational systems and services rather than the branding of the entities, according to Hau. Mergers of existing policies under different insurance brands could be a complicated process, considering distribution, agency and commission systems.
MetLife has not been aggressive in Asia and the Alico deal has more implications for the diversification of its product portfolio, so it is unnecessary for MetLife to merge with the Alico brand, said Hau.
The diversity in corporate cultures for AIA and Prudential also makes it sensible for those entities to remain separate. Hong Kong's Hang Seng Bank continued to maintain its brand and operation after its acquisition by HSBC and both entities have operated well independently in the markets, for example.
However, Hau said operational integration in the arena of administrative and supporting services and systems would save costs.
"Prudential will need to deliver growth from the AIA operations while at the same time remove costs to justify the high price being paid," said Cornes. The rationale for the AIA acquisition is new business growth at good margins.
The AIA and Alico deals would significantly raise the market shares and ranking of Prudential and MetLife in the Asia-Pacific region. Antitrust issues would not be significant as most countries have yet addressed this regulatory topic in Asia, particularly in Southeast Asia. Hau said it may be a concern in China, but the companies' market shares are relatively low.
(By Iris Lai, Hong Kong bureau manager: [email protected])
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