Prudential, MetLife Extend Rivalry Into Japan as AIG Retreats

Prudential Financial Inc. and MetLife Inc., insurers that have competed for U.S. sales for more than a century, are extending their rivalry in Japan as American International Group Inc. sells units.

Prudential, which entered Japan in 1987, is set to buy AIG’s Star Life Insurance and Edison Life Insurance units for $4.8 billion, three people with knowledge of the matter said yesterday. MetLife expects to complete a $15.5 billion deal for American Life Insurance Co., known as Alico, on Nov. 1. Both firms sidestepped the worst of the financial crisis and are expanding in the world’s second-largest life-insurance market as bailed-out rivals retreat.

Prudential’s John Strangfeld is making his second deal in Japan since taking over as chief executive officer in 2008. He’s building a business in a nation that already contributes more than a fifth of Prudential’s revenue. MetLife CEO Robert Henrikson is adding Alico’s more than $7 billion of annual revenue in Japan to a non-U.S. business that reported $5.5 billion of revenue in 2009.

“Met is probably making a riskier acquisition, but there’s a bigger payoff,” said Randy Binner, an analyst who follows U.S. insurers for FBR Capital Markets and has “outperform” ratings on MetLife and Prudential. “Pru would not expect to have that same kind of home run or multiple or expansion. But they’re much more likely to execute it well.”

Photographer: Steve Hockstein/Bloomberg

Prudential Financial Chief Executive Officer John Strangfeld. Close

Prudential Financial Chief Executive Officer John Strangfeld.

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Photographer: Steve Hockstein/Bloomberg

Prudential Financial Chief Executive Officer John Strangfeld.

Prudential, the second-biggest U.S. life insurer, will pay for the AIG units in cash, said the people, who declined to be identified because the negotiations are private.

Purchase Prices

Prudential will pay about book value, a measure of assets minus liabilities, for Star and Edison, according a valuation of the businesses in AIG’s second-quarter report. MetLife is paying about 1.2 times book value for Alico, according to the $12.8 billion valuation for the unit given by AIG in August.

Strangfeld is spending capital that Newark, New Jersey- based Prudential accumulated after the 2008 credit crunch interrupted insurers’ traditional sources of funding. Prudential slashed its dividend two years ago and in 2009 sold a stake in a securities brokerage for $4.5 billion. As the crisis eased last year, Strangfeld, 56, also sold equity and debt.

Henrikson, 63, sold stock in 2008 and agreed to MetLife’s biggest deal in March to grow beyond a U.S. life insurance market that he described this year as “relatively slow- growth.” MetLife, the biggest U.S. life insurer, is picking up Alico’s businesses from Argentina to Russia to Qatar, including the Japan operation that Chief Financial Officer William Wheeler called a “cash machine.”

Non-U.S. Businesses

MetLife entered Japan, Australia and the U.K. with the $11.7 billion purchase of Travelers Life & Annuity from Citigroup Inc. in 2005. After the Alico deal, New York-based MetLife will get about half its non-U.S. earnings from Japan, Suneet Kamath, an analyst with Sanford C. Bernstein & Co., said in a Sept. 22 research note. Alico got $7.8 billion of its revenue from Japan in the 12 months ended Nov. 30, or about 55 percent of its total, MetLife said in an August filing.

Japan accounted for about 17 percent of the world’s life insurance sales last year, according to a study by Swiss Reinsurance Co. Premium volume was $399 billion in 2009, down 0.8 percent when adjusted for inflation, Swiss Re said. In the U.S., the world’s biggest market, premiums dropped 15 percent to $492 billion, according to the Zurich-based reinsurer.

“The outlook for the Japanese life-insurance market remains gloomy, as both household income and employment will stagnate in 2010,” Swiss Re said in the report.

Prudential’s Japan Deals

Earnings from Star and Edison haven’t grown in recent years, Kamath of Sanford C. Bernstein said. Prudential bought bankrupt carrier Yamato Life Insurance Co. last year after winning an auction for the Tokyo-based firm. Prudential acquired a failed Japanese carrier in 2001 and renamed it Gibraltar Life Insurance Co.

“Pru has been able to generate strong growth from Gibraltar through improvements in agent quality, new products and its affiliated and new distribution channels,” Kamath said in the report. “As such, we feel Pru will look for similar opportunities” with Star and Edison, Kamath said.

Prudential’s premiums, policy charges and fee income from Gibraltar and other Japanese operations rose 21 percent to $6.99 billion last year. Prudential posted total 2009 revenue of $32.69 billion.

Gibraltar and Prudential’s original unit, known as Prudential of Japan or POJ, operate separately. As of June 30, the two subsidiaries had about $73 billion in assets, according to a Prudential investors’ presentation on Sept. 14 in Tokyo.

No Bailouts

Henrikson and Strangfeld shunned government bailouts last year, while rivals Hartford Financial Services Group Inc. and Lincoln National Corp. took U.S. capital injections. Hartford, based in the Connecticut city of the same name, was hurt by investment declines and retreated from Japanese and European markets to concentrate on U.S. operations. Philadelphia-based Lincoln sold a U.K. unit and an asset manager.

AIG, once the world’s biggest insurer, is divesting businesses to repay a $182.3 billion U.S. rescue. The Alico deal was valued by MetLife at $16.1 billion in August after the market price of its securities rose.

AIG agreed to hold about $3 billion in MetLife securities from the deal in escrow to indemnify the buyer from costs tied to Alico. The funds could shield MetLife from losses on Alico’s Japanese commercial real estate holdings. AIG also agreed to indemnify MetLife for legal claims and regulatory fines tied to European funds in which client withdrawals were suspended.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net;

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