Analysts are giving MetLife Inc’s proposed $15.5 billion acquisition of American Life Insurance Company from American International Group Inc. good reviews.
AIG, New York, will be getting cash and assets it can use to pay off what it owes to the Federal Reserve Bank of New York, and MetLife will get a bigger presence in the fast-growing Asia-Pacific region, the analysts say.
Jimmy Bhullar and Erik Bass, analysts for JP Morgan Securities Inc., New York, write in a research memo that the deal “enhances MetLife’s franchise and improves the company’s return profile. Also ALICO provides MET with a platform for growth in higher-return foreign markets, primarily Japan.”
“The [AIG sale] expands MetLife’s reach into the Asian region,” says Stewart Johnson, a portfolio manager at Philo Smith & Company, Stamford, Conn. “Coming into the deal, Asia constituted perhaps 15% to 20% of MetLife’s revenue. This buyout will more than double MetLife’s book of business in the region.”
While ALICO operates in more than 50 countries worldwide, Johnson adds, Asia represents the greatest market opportunity for the AIG unit. He cites population growth and still low market penetration as key drivers underpinning the insurer’s expansion into the region.
The deal helps to establish a foothold–if minor–in other parts of the world, says Johnson.
“But the major stakes in the ground are in Asia,” he says. “And the main company that will be feeling that stake in the ground is Prudential Financial, which also has a significant presence in the region. This certainly spices up the rivalry between the two companies.”
Johnson says the deal may have been eased by the fact that AIG Chief Executive Officer Robert Benmosche was the former CEO of MetLife. Benmosche, 65, spent 8 years at the helm of MetLife. In 2000, he led the transformation of the insurer from a mutual company to a public company.
While expressing confidence in Benmosche’s leadership of AIG, Johnson is less sanguine about the insurer’s long-term outlook. He regards the ALICO sale as an “unfortunate, but necessary” move by the company to reduce a still substantial debt owed to the federal government amassed since its financial rescue in 2008.
While viewing the transactions as a positive from a competitive standpoint, JP Morgan’s Bhullar believe that MetLife overpaid for ALICO considering “limited competition for the deal.” Based on the analysts’ calculations, the transaction values ALICO at more than 10 times earnings and above 1.2 times book value.
“While these multiples seem reasonable, they are considerably higher than the sector’s current valuation of 8x 2011 EPS and 0.9x book value,” they write.
The two analysts observe also that the deal could “present opportunities” for other insurers. The ALICO sale and the recent transaction to sell AIA (to Prudential UK) increase the chances that AIG will dispose of its other foreign life subsidiaries.
“In our opinion, Prudential Financial is well-suited to pursue a deal for AIG Star and AIG Edison, two formerly bankrupt Japanese insurers,” they write. “PRU’s strong capital position and potential synergies with Gibraltar (also a previously distressed Japanese insurer) would enable it to achieve significant cost savings through a possible acquisition of Star and Edison.”
Based on recent ratings agency commentary, the analysts adds, MetLife could be downgraded by one or more agencies. The company is currently rated AA/Aa. A drop to A by all major agencies would “adversely affect” the insurer’s competitive position in corporate funding products, structured settlements, pension closeouts, and similar arrangements, which account for roughly 20% of total earnings.
Several ratings agencies issued their assessments of the AIG-MetLife deal. Among them:
- The Moody’s Investors Service, New York, affirmed MetLife Inc.s’ credit ratings (senior debt at A3) and the insurance financial strength ratings of its subsidiaries, including Metropolitan Life Insurance Company, at Aa3. The rating outlook for the long-term ratings of MetLife and its subsidiaries was changed to negative from stable.
- Moody’s also affirmed the A1 insurance financial strength rating of ALICO and changed the outlook to stable from developing. The rating agency said that the affirmation of ALICO and the change in outlook to stable from developing is based on “the resolution of its ownership uncertainties, given the planned acquisition by MetLife, as well as the recent stabilization of its business fundamentals.”
“The resolution of ALICO’s ownership, which had clouded its business prospects, will be a key factor behind its return to growth as a strategic part of MetLife when the global economy improves,” according to Laura Bazer, a Moody’s senior credit officer.
- Fitch Inc., New York, affirmed AIG’s issuer default rating and senior and hybrid securities ratings. Additionally, Fitch revised the Rating Watch status of ALICO’s A plus insurer financial strength rating to “positive” from “evolving.”
- Standard & Poor’s, New York, says it kept most of its ratings on MetLife and subsidiaries, including the A plus long-term counterparty credit rating on MetLife, on CreditWatch, where they were placed “with negative implications” on Feb. 3. S&P also affirmed its A-2 short-term rating on MetLife and its mxAAA ratings on MetLife Mexico S.A. and removed them from CreditWatch negative.
“The CreditWatch reflects MetLife’s agreement with AIG to acquire AIG’s international life insurance subsidiary, ALICO,” Shellie Stoddard, a Standard & Poor’s credit analyst, says in a statement. “The transaction should enhance both business and financial profiles in the long term, but we believe it carries significant execution risks and comes at a time when capitalization is weak for the rating.”