Pru-AIG’s AIA Life Marriage Makes Strategic Sense But Carries Risks

By | March 1, 2010

Prudential Plc’s $35.5 billion offer for American International Group Inc.’s Asia business marries the UK insurer’s fast-growth strategy with AIA’s mature business profile — a logical, strategic coupling.

The two companies would have an estimated $95 billion in policyholder reserves and market leadership in eight markets — including China, and a No.2 position in India — in a region that is a growth hub for insurers.

But, while it may look a perfect fit, there are integration risks and, for employees, the operational overlap, especially in some Southeast Asia markets, could trigger job losses.

“Synergies in Singapore and Malaysia will have to come from cost cutting since both firms already have large market share,” said the former CEO of an insurance company in Asia, adding that a merged company would be market leader in both countries.

Prudential confirmed on Monday it was in talks with AIG, which had been planning a $10 billion plus Hong Kong initial public offering for its AIA unit.

In Asia, the ratio of life insurance premiums to GDP is forecast to rise to about 5 percent by 2018 from about 3 percent now, according to Bernstein Research analyst Toby Langley.

As word of a possible deal spread, AIA sought to assure its staff. “Prudential is nowhere as big as us, we are the biggest in Hong Kong, there is no question of a takeover,” one AIA employee said, referring to internal assurances at the company.

The sources declined to be identified due to the sensitivity of the issue.

While a Prudential bid is likely to have the blessing of the U.S. administration — as this would bring more certainty to the business and a return of a big chunk of taxpayer bail-out funds — a deal is likely to be far from smooth.

The two companies operate with different joint venture partners in several Asian markets, making it tough to integrate the businesses in various jurisdictions.

For example, in India, Prudential has a venture with ICICI Bank, while AIA has joined forces with the Tata Group. In China, Prudential has a life insurance venture with Citic Group, while AIA has gone it alone and built up a near-20 percent market share.

If the logistical synergies can be released, a joint Prudential/AIA would have a significant lead over rival foreign life insurers in Asia — such as Manulife, AXA, Allianz, ING, HSBC and Aviva.

“A merged entity (would be) one of the most geographically diversified insurance groups in Asia-Pacific,” said Sally Yim, vice president at Moody’s in Hong Kong and senior analyst who covers Asia-Pacific’s insurance industry.

“A combined entity would likely hold top positions in many markets. It would make them very powerful and make it harder for smaller players to compete.”

“There could be some issues because they might be too dominant in some markets. For example, in Singapore they may have over 30 percent market share. It’s significant. There might be concerns about customer choice,” Yim said.

“There might be some questions raised, but I don’t think it would trip the deal.”

(Additional reporting by Parvathy Ullatil in HONG KONG, Kevin Lim and Saeed Azhar in SINGAPORE, Samuel Shen in SHANGHAI and Tony Munroe in MUMBAI; Editing by Ian Geoghegan)

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