MetLife’s Bid to Buy Alico Broadens Geographic Footprint, but Not Without Risks

<p>MetLife Inc.'s bid to buy one of the biggest international subsidiaries of American International Group Inc. in a roughly $15.5 billion deal greatly expands its geographic footprint, especially in Japan. But the deal doesn't come without risks for the largest life insurer in the United States.

MetLife said it agreed to acquire AIG's American Life Insurance Co. unit in a transaction that will consist of $6.8 billion in cash and about $8.7 billion in MetLife's equity securities.

MetLife said it would become a top competitor in Japan -- the world's second-largest life insurance market. 

"I think I can safely say this acquisition establishes MetLife as perhaps the premier global insurance franchise," said C. Robert Henrikson, chairman, president and chief executive officer of MetLife (NYSE: MET) in a conference call.

The transaction also advances its position in Europe and moves it into a top-five market position in emerging markets in Central and Eastern Europe, the Middle East and Latin America, MetLife said.

Given Alico's position, it's "a franchise that one could not build without a significant amount of time and resources over many years," Henrikson said.

William Toppeta, president of MetLife's international business, dubbed Alico a "major force" in Japan but pointed out it operates in 55 countries -- with a top-five market share in 23 of them. Overall, Alico has been a profitable franchise, with post-tax operating income of about $1.5 billion in 2009, he said.

MetLife has about 70 million customers worldwide but the addition of Alico would bring that total to about 90 million customers, Toppeta said. Alico's products are diversified -- with 45% of its business being accident and health; 33% life insurance and 15% fixed annuities, which means little capital and equity markets risk, according to Toppeta.

Currently, MetLife's business in Japan is predominantly variable annuities, he said.

Alico's distribution comprises 37% agency, 26% bancassurance, 22% brokers and 15% direct marketing, Toppeta said.

However, two distribution channels in Japan -- namely, the bank channel and sponsored direct marketing have been hurt by the crisis at AIG, Toppeta said. "We believe that becoming a part of MetLife, with the strength and stability we provide, will go a long way toward re-establishing confidence with third-party distributors."

Last month, A.M. Best Co. placed the financial strength ratings and issuer credit ratings of the life/health and property/casualty insurance subsidiaries of MetLife under review with negative implications and placed the ICR of MetLife under review with negative implications (BestWire, Feb. 9, 2010). Best said the magnitude of the deal created uncertainty over the impact on MetLife’s balance sheet.

Marc Steinberg, senior financial analyst with A.M. Best, outlined some of the risks to MetLife, including risks associated within the regions Alico operates including local regulatory and market risks.

There's also integration risks as specific characteristics of two organizations are brought together, as well as general operational risks and financial risks, to name a few, Steinberg said.

Bill Wheeler, chief financial officer, said MetLife did have concerns around Alico's Japanese real estate assets so it negotiated a loss-sharing agreement for that asset class.

MetLife also will be indemnified against any obligations that may arise from the wealth management business in the United Kingdom, he said. There isn't a lot of financing risk in the transaction but if the capital markets become difficult this year, MetLife put together "a bridge commitment," Wheeler said.

AIG (NYSE: AIG) said the cash will be used to reduce the liquidation preference of the Federal Reserve Bank of New York in the special-purpose vehicle formed by AIG and the Fed to hold the interests in Alico. "This sale is an important step toward repaying the government," said AIG Chairman Harvey Golub in a statement (BestWire, March 8, 2010).

The equity security portion of the purchase price, MetLife said, will consist of 78.2 million shares of MetLife common stock valued at $3 billion; 40 million equity units having a total value of $3 billion and 6.9 million shares of convertible preferred stock valued at $2.7 billion, MetLife said. It expects the cash portion to be paid for by issuing senior debt and its common stock, along with available cash

Wheeler said at close, AIG's SPV will own about 8% of MetLife's common. "I mentioned those common equivalent securities...after a shareholder vote, post-closing, those will convert to common," he said. Then, its ownership will be 14%, which should happen sometime around 2011, Wheeler said.

Wheeler said he expects the AIG SPV will start to sell shares when it's able to under the terms of the lock-up arrangement. The Alico SPV plans to monetize the MetLife securities over time after the lapse of the minimum holding periods, MetLife said.

On the afternoon of March 8, MetLife's stock closed at $40.90 a share, up 5.09% from the previous close, while AIG's stock closed at $29.10 a share, up 3.63% from the previous close.

Metropolitan Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior). American Life Insurance Co. currently has a Best's Financial Strength Rating of A (Excellent).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])