AIA Warns Failed Prudential UK Deal Could Impact Business

By and | October 5, 2010

AIA Group Ltd, which aims to raise about $15 billion through a Hong Kong listing, flagged a series of business risks including the collapsed bid from Prudential Plc as it launched the share offering on Tuesday.

AIA, the Asian life insurance business of American International Group Inc, also said in the preliminary prospectus filed to the Hong Kong Stock exchange that it would not pay a dividend before 2011.

AIG is planning to sell 48.6 percent stake in AIA to raise up to $14.86 billion, a document obtained by Reuters showed late on Monday. The net proceeds will be used to repay financial aid AIG received from the U.S. government.

AIG revived AIA’s IPO after Prudential cut its takeover offer for AIA to $30.4 billion from $35.5 billion. In contrast, the IPO would value AIA at as much as $30.5 billion, sources told Reuters on Monday.

“The terminated Prudential transaction also adversely impacted and may continue to adversely impact agency recruitment and new business production by our agents,” AIA said in its prospectus. “We cannot assure you that our business and prospects will not be materially and adversely affected by the terminated Prudential transaction.”

AIA, an Asia-focused insurer, is selling 5.86 billion secondary shares at an indicative price range of HK$18.38 [US$2.37] to HK$19.68 [US$2.537] per share.

At the offering price range, AIA is valued at 1.2 to 1.3 times 2010 basis embedded value estimated by bookrunners, according to a term sheet obtained by Reuters on Tuesday.

By comparison, China Life Insurance Co Ltd, China’s No.1 life insurer, traded at 2.4 times forecast 2010 embedded value, while No.2 life insurer Ping An Insurance (Group) Co of China Ltd traded at 2.6 times forecast 2010 embedded value, according to a BofA Merrill Lynch research report.

“Most retail investors are short-term oriented and they prefer to invest in small to mid-cap IPOs,” said William Lo, an analyst at Ample Finance. “AIA is not a pure Chinese insurer, and China accounts for only a small proportion of its business, so investors are not treating AIA as a high growth stock.”

Others Asian insurers, including Japan’s Dai-ichi Life Insurance Co Ltd and Korea’s Samsung Life Insurance Co Ltd trade at 0.37 times and 1.11 times 2010 forecast 2010 embedded value, respectively.

Embedded value is a measure commonly used to gauge the value of insurance companies and includes the present value of future profit from long-term insurance contracts.

AIA was already operating in mature markets in Asia with high market shares, so room for growth was less than that of peers, Bank of America Merrill Lynch said in a research report.

Also, AIA is a little slow in tapping alternative distribution channels and is unable to team up with key banks in most key markets, which may affect long-term growth prospects. China expansion would remain one of the biggest challenges for AIA as the branch approval procedure is slow there.

Although AIA is the only foreign life insurer to operate a 100 percent-owned unit in China, its market share there fell from 1.51 percent in 2004 to about 0.69 percent in the first eight months of 2010, according to China Insurance Regulatory Commission (CIRC) data.

AIA operates in China’s Guangdong and Jiangsu provinces and the cities of Beijing, Shanghai and Shenzhen.

In a separate statement, AIA said it had formed a new board of directors ahead of the IPO.

(Reporting by Denny Thomas and Kennix Chim; Editing by Chris Lewis)

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