AIG made headlines recently with its sale of its Asian Insurance business for over $35 billion to British insurance firm Prudential plc. This allowed the failed insurer to raise enough to pay back the $20 billion immediately due to the government and slowly pay back its debt to taxpayers. The company also is pressing to sell its Alico unit to bidders including Metlife. The proceeds of this sale would also go the Fed.
According to the Washington Post, “American International Group agreed on Monday to offload its prized Asian life insurance business for $35.5 billion, the troubled firm’s largest asset sale since it was bailed out by the federal government during the height of the financial crisis.
The firm plans to use the proceeds from the sale to pay down nearly three-fourths of the $48 billion owed to the Federal Reserve. AIG separately received more than $47 billion from the Treasury Department’s Troubled Assets Relief Program.
The buyer, British insurer Prudential — not linked to the U.S. insurance firm Prudential Financial — agreed to pay $25 billion in cash and $10.5 billion in stock and other securities. Under the deal’s structure, the U.S. government will have an interest in Prudential’s fortunes through its massive stake in AIG.
The sale generated more for AIG than what some analysts had expected. AIG had been receiving weak bids for the division and was planning to spin it off in an initial public offering on the Hong Kong stock exchange. That process could have taken a long time and produced less money than the deal with Prudential, company and government officials said.
“We decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayers,” AIG chief executive Robert Benmosche said in a statement.
Shares of AIG soared nearly 10 percent at the opening bell before closing the day up 4 percent, at $25.78. The insurer’s stock hit a low of $7 during the financial panic.
Wall Street often views big deals as a vote of confidence in the global economy. And on Monday, the Dow Jones industrial average rose 78.53 points, or 0.8 percent, to 10,403.79, with much of the gain occurring right after the sale was announced. The Standard & Poor’s 500-stock index, a broader measure of the market, jumped 1 percent and moved into positive territory for the year.
The sale of the Asian unit, American International Assurance, would generate more money for AIG than the sum from nearly two dozen divisions it has agreed to divest from since fall 2008. AIG is pressing to get a multibillion-dollar deal for another major insurance unit known as American Life Insurance Co., or Alico. Proceeds from that sale would also go to the Fed.
The price AIG fetched for its Asian division affirms a decision by the Fed to give the company more time to sell its assets. Last year, AIG would have had to sell the unit during the recession to meet its debt obligations to the central bank. Instead of cash, the Fed accepted an equity stake in the Asian division as repayment.
The central bank’s bailout package to AIG came in two parts: a $23.4 billion line of credit and a $24.5 billion interest in American International Assurance and Alico.
Of the $35.5 billion from Prudential, AIG will use $16 billion to pay back the Fed’s interest in American International Assurance. Another $9 billion will be used to reimburse the Fed’s line of credit. AIG will eventually be able to sell its $10.5 billion in Prudential stock and securities, which will be used to further repay the Fed’s line of credit.
AIG’s health has improved steadily since the federal government’s bailout, though it is still losing money. Last week, it reported a $8.9 billion loss for the last three months of 2009, bringing its full-year results to a loss of $10.9 billion. In 2008, the firm recorded a $99.3 billion loss.
According to Kevin Crowley and Zach Miller of Bloomberg “American International Group Inc. agreed to sell an Asian life insurance unit with 20 million customers to Prudential Plc for $35.5 billion in the company’s biggest divestiture since it was bailed out by the U.S.
Prudential, Britain’s biggest insurer, will pay $25 billion in cash and $10.5 billion in stock and other securities for AIA Group Ltd., the London-based insurer said in a statement today. The insurer said it plans to raise $20 billion in a rights offering and sell about $5 billion of bonds to finance the cash part of its offer.
The sum raised in the sale would exceed the total of more than 20 other deals announced by AIG since its 2008 rescue. The firm had planned an initial public offering for the unit after an auction of the business previously failed to turn up bids that matched what AIG executives thought the company was worth. That included a bid from Prudential that valued AIA at about $15 billion, according to a person with knowledge of the matter.
The agreement is “very good news for AIG and a major step toward quickly repaying U.S. taxpayers at a time when, in our view, the company appeared resigned to carrying out a time- consuming IPO,” said Emmanuelle Cales, an analyst at Societe Generale SA.
AIG gained $2.45, or 9.9 percent, to $27.22 at 9:42 a.m. in New York Stock Exchange composite trading. Prudential fell 12 percent to 533 pence in London trading. Prudential had more than doubled in 12 months through Feb. 26, giving the insurer a market value of 15.3 billion pounds before the purchase was announced.
Prudential’s purchase is Chief Executive Officer Tidjane Thiam’s first since he took over five months ago, and is the biggest announced by any company worldwide this year, according to data compiled by Bloomberg. New York-based AIG will own about 11 percent of Prudential following the transaction, Thiam told reporters today.
Prudential is trying to boost sales in Asia as growth in the U.K declines. By acquiring AIA, Thiam gets a business with more than 90 years in Asia and more than $60 billion of assets in 13 markets spanning China to Australia. The price is about 50 percent greater than Prudential’s market value. Hong Kong-based AIA, founded in 1919, sells life, accident and health insurance policies, and private retirement planning and wealth management services, its Web site shows.
“It shows the company is very bullish on the Asia market,” said Luo Yi, a Shenzhen-based analyst at China Merchants Securities Co. “The Chinese market has vast potential.” McKinsey & Co. has estimated that 40 percent of global life insurance premium growth will be in Asia in the next five years.
“A sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayer,” AIG CEO Robert Benmosche said in a statement today.
“AIG gave a $9 billion stake in American Life Insurance Co., known as Alico, and $16 billion in AIA, its biggest non-U.S. life insurance units, to the Federal Reserve in December. AIG will redeem the Fed’s $16 billion interest in AIA with proceeds from the sale and repay about $9 billion more on its Fed credit line, the insurer said today.
The $10.5 billion in securities obtained from Prudential will be sold “over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods,” AIG said in a statement. Proceeds will be used to repay debt on the credit line, the company said.
AIG owed about $25 billion on the line as of last week. The insurer had drawn more than $40 billion before reducing the sum in December when it turned over stakes in the units.
The Federal Reserve Bank of New York agreed last year, as part of AIG’s fourth bailout, to allow the company to pay down its debt with an equity interest in the life units before completing a sale. The plan reduced pressure on AIG to sell in early 2009 when potential bidders were hobbled by losses and the inability to raise funds.
Prudential is paying about 1.69 times the embedded value of AIA in 2009. Chinese insurers are trading for about 2.9 times embedded value, and Axa Asia Pacific Holdings trades at about 1.7 times, according to Thiam. Embedded value estimates a company’s net worth excluding new business.
“Strategically it’s probably the right move” for Prudential, said Justin Urquhart Stewart, who oversees about $3.3 billion at 7 Investment Management in London, including Prudential shares. “It puts them into a different league.”
The insurer plans to list its shares on both the Hong Kong Stock Exchange and the London Stock Exchange following the transaction. It will keep its headquarters in London.
Credit Suisse Group AG, JPMorgan Cazenove and HSBC Holdings Plc agreed to underwrite the $20 billion rights offer in full. The shares are likely to be sold for 40 percent less than today’s price, Thiam told reporters. Prudential will pay about $1 billion in fees and other costs related to the offer. Lazard Ltd. is also advising Prudential on the deal.
The offering would be the biggest since Lloyds Banking Group Plc’s 13.5 billion pounds ($20.4 billion) sale in December, still the U.K.’s largest.
“If you’ve got backing from a few banks and a few major shareholders, there will be a way to make this deal happen,” said Marcus Barnard, a London-based analyst at Oriel Securities Ltd. with a “sell” rating on the stock. “The question is the cost and the risk involved.” The insurer may be forced to sell assets in India and China to comply with local foreign-ownership regulations, he said.
India, China Talks
Thiam said Prudential is in talks with regulators in India and China. The insurer intends to keep its stake in a joint venture with China’s Citic Group, he said. In India, where both Prudential and AIG have separate joint ventures, regulators have told the company it can’t have two licenses, Thiam said.
MetLife Inc. has said it is in talks to buy AIG’s Alico, which operates in more than 50 countries outside the U.S. The insurers are discussing a price of about $15 billion, according to people with knowledge of the matter.
AIG’s bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and $52.5 billion to buy mortgage-linked assets owned or backed by the insurer.
AIG is getting advice on the AIA deal from Goldman Sachs Group Inc. and Citigroup Inc., and Blackstone Group LP is working with the AIG board on its overall restructuring plan. Morgan Stanley is counseling the New York Fed.
Prudential Plc has no relation to Newark, New Jersey-based Prudential Financial Inc. and operates in the U.S. through its Jackson National Life Insurance Co. unit.”