AIG, which is nearly 80 percent owned by the U.S. government and is trying to pay back taxpayers after a $182.3 billion bailout, had been planning an initial public offering for AIA in Hong Kong, when Prudential jumped in with an offer.
Lately the latest news that Britain's largest insurer, Prudential plc confirmed that it has reached an agreement to merge with AIA Group, the Asian life insurance business wholly owned by American International Group (AIG).
On March 1 2010, AIG agreed to sell AIA to Prudential for US$35.5 billion (S$50 billion), comprising US$25 billion in cash, and US$10.5 billion in shares and other securities.
Prudential arranged with Credit Suisse, HSBC and JP Morgan Cazenove to underwrite a US$20 billion rights issue of shares and US$5 billion of senior debt to raise the US$25 billion in cash. Prudential agreed to pay AIG a break fee of & pound 153 million (S$322 million) if it failed to complete the purchase within 12 months.
The merger, which ranks as the largest insurance M&A ever, will create a life insurance powerhouse in Asia with more than 20 million customers and businesses in 15 countries. It will also provide AIG with much needed cash as it strives to repay the $182.3 billion.
Now a bit of the history,American International Assurance (AIA),founded in 1919, is the Asian insurance business of American International Group (AIG). AIA is a major player in 15 Asian markets, with 23 million policies in force for more than 10 million customers and a sales force of 320,000 agents.
Faced with financial difficulties, AIG had planned to divest AIA through an initial public offering (IPO) of shares in the company on the Hong Kong Stock Exchange. However, British insurer Prudential pre-empted the IPO.
In a statement to the London Stock Exchange announcing the acquisition, Prudential remarked that the combination of AIA and Prudential would be 'the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines'.
It would be one of the largest overseas deals to date for a British firm and make Prudential one of the biggest insurers in Asia.
For Prudential, one of the key benefits is to establish itself as an industry leader in seven Asian markets. In Singapore, the combined company would be responsible for 28 per cent of all non-investment-linked life insurance policies in force. It would command an even larger share, 59 per cent, of all investment-linked life insurance policies in force. The market share of the combined company in new policies would be similar.
To show how important is this merger, soon after the agreement, Prudential chief executive officer (CEO) Tidjane Thiam made a flying visit to the region with AIG chief Robert Benmosche. Together, they met staff and agents to reassure them of their future with the combined company. In Singapore, about 800 staff and agents attended a town hall-style meeting at Suntec City with the two CEOs. Apparently, Mr Benmosche and Mr Thiam also met government regulators.
The extent to which a merger or acquisition limits competition depends in part on the market shares of the respective parties. In the AIA-Prudential case, as the figures above illustrate, the market shares vary with the market. Clearly, there will have to be deep analysis and discussions about the definition of the market in each instance.
The Prudential acquisition of AIA potentially affects millions of policyholders. From the consumer viewpoint, this may perhaps be one of the most impactful cases to come before the competition authorities in the region.
