Prudential jolts Asian insurance merger and acquistion to life

Prudential's proposed acquisition of AIG's Asian crown jewel puts pressure on other insurers to bulk up in the fast-growing region and could trigger a series of rival approaches and consolidation deals.                                           

Canada's Manulife Financial and France's Axa are both seen as potential contenders for AIG's American International Association (AIA) unit, because of their ambitions to grow in Asia. 

"The move by Prudential also puts pressure on companies like Generali, Zurich and to a lesser extent Aviva because they would have a smaller Asian presence (than Prudential-AIA)," said analyst Eamonn Flanagan of Shore Capital.                                          

The deal is the one of biggest ever in the insurance sector, and a welcome relief for merger and acquisitions bankers in Europe, where deal volumes have been lagging those in the United States and in Asia.                                             

Asian insurance markets like Indonesia, South Korea and Thailand, where AIA does business, are booming as young populations look to spend on savings products, with governments offering less social security than in most western countries.        

The purchase of AIA would be "a once in a lifetime opportunity" for Prudential, which generated nearly half its 2008 profit in Asia, and for its charismatic chief executive, Tidjane Thiam, the architect of the current offer, Flanagan said.                                          

ING's Asian assets are the next most attractive route into Asia after AIA, according to an investment banker who covers the financial services industry, offering a possible next way into the market for Prudential's rivals.                                          

The Dutch bancassurer is splitting off its worldwide insurance operations as part of a restructuring mandated by the European Union, and analysts say the AIG sale raises the prospect of an early exit.                                           

"If somebody taps the shoulder of the Dutch government offering cash, I think we could see a quick sale of ING," the banker said. "This is one of the few remaining assets that offers entry into a range of Asian markets. There may be quite a scramble for it."                                           

ING said earlier this month that it planned to spend the rest of the year working on how to split off its insurance business, making a trade sale or an initial public offering for the business unlikely until at least 2011.                                                                                   

UK CONSOLIDATION                                           
Prudential's transformation into an Asian operator raises the question about how other large insurers in Britain will deal with a lack of growth, and little demand from foreign competitors for their business.                                           

The general consensus is that the UK insurance industry is not especially ripe for consolidation because it is a capital intensive business with low growth and low profitability. 

Draft EU rules for insurance solvency could push Britain's insurers into a 50 billion-pound capital raising deficit, making insurers less attractive as acquisition targets.

Concern is focused on the so-called Solvency II regime''s treatment of annuities, a capital intensive product that is typically sold by British life insurers rather than their continental rivals.       

As currently drafted, the rules would force insurers like Legal & General, Standard Life and Aviva to hold extra capital to make up for a drop in the market value of the corporate bonds they use to fund payments to policyholders.                                           

"The main thing you can read from (Prudential's bid) is that the UK is not an attractive market to be in. Prudential is trying to reduce its exposure with this deal," said Toby Langley, an analyst at Bernstein Research.                                           

The exception to the rule is bid vehicle Resolution, founded by insurance entrepreneur Clive Cowdery in 2008 to consolidate and extract synergies from UK financial services companies.

Resolution aims to buy and merge at least three life insurers or fund managers with a view to selling or floating the resulting company at a profit in 2012, which could be made easier if Solvency II brings the sector more distress.  

Although Resolution said on Monday it was not in talks to buy Prudential's UK arm -- bankers describe the unit as a cash cow that the insurer would be unwilling to give up -- the firm has drawn up a list of about 25 possible targets including Standard Life, Legal & General and Aviva.                                           

"I could see Resolution trying to manufacture a break-up bid for Aviva. There is a level of shareholder dissatisfaction with the company that says operational performance is not good enough," said Flanagan.                                           

Aviva declined to comment.