In what has been described as a win-win deal for both
parties, MetLife is to acquire AIG’s Alico unit in one of the
insurance industry’s largest deals. For AIG, the deal will bring in
much-needed capital to reduce its debt, and for MetLife provide
significant scope for global growth. Charles Davis


Scrambling to repay billions in US
government aid, American International Group (AIG) has announced
plans to sell a second life and health insurance unit to rival US
insurer MetLife for $15.5bn. The deal is the sixth-largest in the
global insurance market.

Confirming long-rumoured plans to sell its
American Life Insurance Company (Alico) unit, AIG’s sale will give
MetLife a significant presence in Japan, prominence in Europe and
South America, and the top positions in Russia and Chile, in terms
of premiums written.

The boards of MetLife and AIG have approved the
transaction, and the companies hope to close by the end of the

AIG says it will use the proceeds from the
deals to pay the US government back part of the bailout financing
it received. If all goes as planned, AIG will generate about $51bn
in deal volume, including $31.5bn in cash and $19.2bn in
securities. AIG would pay about $ 31.5bn to the Federal Reserve
Bank of New York.

The money paid to the New York Federal Reserve
would include $6.8bn in cash proceeds AIG expects to get from
MetLife when the deal closes, AIG states.

However, even after wiping away $51bn, AIG will
still owe about $45bn to the US government. That amount is likely
to keep growing slowly, because the government made large sums
available – $182bn in a number of forms. The company has not drawn
down the full amount and every few months it taps $1bn or $2bn more
to finance its restructuring or bolster its insurance units.

Founded in 1921, Alico sells accident and
health insurance as well as life insurance and fixed annuities to
about 20m clients in 55 countries. It has 12,500 employees and
60,000 agents, brokers, banks and other intermediaries in its
distribution networks.


AIG’s big MetLife stake

AIG would get a significant equity
stake in MetLife, New York, but MetLife chairman C Robert Henrikson
said reports suggesting AIG could end up with a 20% stake are

At the deal’s close, AIG would own 8% of
MetLife, and it would have the potential to buy an additional 14%,
but only after a three-year waiting period, after which it could
convert preferred shares.

The deal was the “result of a long and diligent
study” and “an opportunity to acquire an international insurer that
is very complementary to our company”, Henrikson said.

The acquisition should improve MetLife’s growth
in earnings and return on equity “both immediately and over the
long term”, he added. “It significantly accelerates our global

The MetLife-Alico deal is the second proposed
sale of a key AIG subsidiary announced in recent weeks. On 1 March,
AIG said it had agreed to sell AIA Group Ltd, an international life
unit, to UK insurer Prudential for about $35bn (see
mega Asia deal comes with risk

A special purpose vehicle (SPV) has been formed
by AIG and the New York Federal Reserve to hold AIG’s interests in
Alico,  according to AIG and MetLife.

The SPV would h old more than 78m shares of
MetLife common stock and about 6.9m shares of MetLife preferred
stock –  these could be converted into about 68m shares of
common stock – and 40m equity units of MetLife with a liquidation
preference of $3bn.

The SPV intends to turn the MetLife securities
into cash over time, after the end of the minimum holding period,
according to AIG. The SPV would then pay the remainder of the
resulting proceeds to the New York Fed.


A win-win deal

Analysts widely praised the deal as a
win for both companies. AIG will be getting cash and assets it can
use to pay off what it owes to the Federal Reserve, while MetLife
will get a bigger presence in the fast-growing Asia-Pacific region,
analysts say.

Upon completion of the transaction, MetLife,
which is already the largest life insurer in the US and Mexico,
will become a leading competitor in Japan, the world’s
second-largest life insurance market. The transaction materially
advances MetLife’s position in Europe. It also moves MetLife into a
top-five market position in many high-growth emerging markets in
Central and Eastern Europe, the Middle East and Latin America.

JPMorgan Securities analysts Jimmy Bhullar and
Erik Bass wrote the deal “enhances MetLife’s franchise and improves
the company’s return profile. Alico also provides MetLife with a
platform for growth in higher-return foreign markets, primarily

MetLife is also looking to Alico to spearhead
its drive into the Middle East.

“Combining our [MetLife and Alico] global
footprints and successful business models will create an unrivalled
global life insurance franchise, which will significantly advance
the standing of the combined business in the Middle East,” said
Michel Khalaf, Alico CEO for Middle East, Africa & South

Bhullar and Bass also observed 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

“In our opinion, [US insurer] Prudential
Financial is well-suited to pursue a deal for AIG Star and AIG
Edison, two formerly bankrupt Japanese insurers,” Bhullar and Bass
wrote. “Prudential’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.”

Moody’s vice-president and senior credit
officer Laura Bazer said: “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.”

MetLife expects the transaction to increase
its 2011 operating earnings per share by approximately $0.45 to
$0.55 per share, and enable the company to increase its estimated
2011 year-end operating return on equity by 140 to 160 basis
points. Operating earnings per share does not include transition
and other one-time expenses estimated at $0.12 per share.