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If U.S.-based Prudential Financial Inc.'s acquisition of two Japanese life insurance companies of American International Group Inc. is cleared, it could become the largest foreign life insurance company in Japan based on in-force life insurance.
Prudential, the second-biggest U.S. life insurer, said it would buy AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co. from AIG for $4.8 billion. The transaction will be financed with a combination of common equity, senior unsecured debt and internal resources. Prudential also will assume roughly $600 million of existing debt obligations of Star Edison (BestWire, Sept. 30, 2010).
Prudential would be the largest foreign life insurance company in Japan based on in-force life insurance, Steven Schwartz, an equity analyst with Raymond James, said in an e-mail. The U.S.-based Aflac Inc. (NYSE: AFL) would remain the largest foreign life insurance company based on insurance premiums, he said.
John Strangfeld, chairman and chief executive officer of Prudential (NYSE: PRU), said Japan is the third-largest economy in the world, as well as the second-largest life insurance market. The acquisition of the AIG companies will "significantly increase the scale of our operations in Japan," he said in a Sept. 30 conference call (BestWire, Sept. 30, 2010).
AIG Star and AIG Edison sell life, medical insurance and annuities to individuals and groups through their captive agent, independent agent, corporate and bancassurance channels. Combined, the companies have about 10,400 employees, including about 7,800 career agents, as well as 5,500 independent agents, AIG said.
A.M. Best views the acquisition announced by Prudential Financial as "slightly positive," said Ken Johnson, financial analyst in the life/health ratings division of A.M. Best, in an e-mail. The business to be acquired is familiar to Prudential, which has been successfully operating in the Japanese market for more than 30 years via its organic footprint and acquisitions, he said.
The pro forma earnings base will be about $400 million, Johnson said. Based on company filings, the combined Prudential/Star Edison business will have a modest improvement in rankings when measured by in-force and premium income, which is mid top 10 and behind some of the large local insurers.
The Star/Edison captive agency force should mesh well with that of Gibraltar Life, one of the two current Prudential Japanese businesses, Schwartz said. Prudential operates primarily through captive agents, as does Star/Edison, he said
The addition of the companies will have a significant impact on asset size, insurance revenues, and the number of captive agents, Johnson said. "We view the growth in captive agents and the increased access to the fast-growing bank channel as a positive for this transaction."
Japan is considered a growing market due to its favorable demographics, Johnson said. The country has more than $15 trillion in savings, with close to 50% of that in low-yielding investments (in banks or the postal sector), "so clearly there are some significant opportunities in this market for life insurance and annuity producers."
Over the past two years, new business production from independent agents and the bank channel decreased due to the global economic crisis, Johnson said. On top of that, they also suffered from the specific impact the crisis had on AIG as a whole, he said.
"By almost doubling its existing captive and independent channel, Prudential should be able to take advantage of a growing insurance market for its protection and retirement products," Johnson said. Also, Prudential's existing Gibraltar subsidiary saw major new business growth through the bank channel.
"This acquisition basically doubles the number of banks utilized by Prudential in this fast-growing channel," Johnson said.
Robert Benmosche, chief executive of AIG, said in an audio statement on the company's website that the company is "glimpsing sunshine" as it announced plans to repay its debt to the federal government and said it would the sell two Japanese life insurance companies (BestWire, Sept. 30, 2010).
Under the plan to repay its bailout, AIG would pay back $20 billion in senior secured debt under the Federal Reserve Bank of New York Credit Facility through parent company resources and proceeds from the disposal of AIG assets, including the planned initial public offering in Hong Kong in late October of its Asian life insurance unit, AIA Group.
AIG also said its pending $15.5 billion sale of American Life Insurance Co. to MetLife Inc. would help fund the repayment (BestWire, Sept. 30, 2010).
MetLife (NYSE: MET), the largest U.S. life insurer, plans to acquire ALICO -- one of AIG's biggest international subsidiaries -- in a transaction that would consist of $6.8 billion in cash and about $8.7 billion in MetLife's equity securities. The deal would greatly expand its geographic footprint, especially in Japan -- the world's second-largest life insurance market (BestWire, March 8, 2010). The combination with Star/Edison would make Prudential bigger than MetLife in Japan in terms of insurance revenues and life insurance in-force, Schwartz said.
Prudential Insurance Company of America currently has a Best's Financial Strength Rating of A+ (Superior).
(By Fran Matso Lysiak, senior associate editor, BestWeek:
[email protected], and Meg Green, senior associate editor, BestWeek: