Moody's Find Significant Execution and Integration Risks in Prudential's Acquisition of AIA Group
Last Monday, Prudential announced its intention to purchase AIA Group Limited, the pan-Asian life insurance business of American International Group, Inc. (AIG), for US$35.5bn. The credit ratings agency Moody’s has commented that the deal is quite large relative to Prudential’s current size. It is a slight credit negative for both companies, even though the proposed financing will not materially increase the leverage of Prudential or AIA Group, given the significant execution and integration risks inherent in the transaction.
The purchase amount represents around 1.5 times of Prudential’s pre-announcement market capitalisation. A large portion of the proposed funding includes equity financing, and the AIA Group has very little debt outstanding; consequently, Moody’s does not expect a materially negative impact on the leverage ratio for the combined group.
The merger will involve two very large multinational operations, and it will therefore demand a considerable amount of management time to secure the efficiency of a group with operations in Asia, the UK and the US. In addition, obtaining regulatory approval from a number of regulators in Asia will also take some time.
Both Prudential and AIA Group carry out their life insurance business mainly through their tied agency force in Asia. Moody’s believes that the two will have to align their agent compensation structures and product suites. The companies will also have to come up with clear strategies to manage and integrate these two large agency forces, which have been head-to-head competitors historically.
AIA Group operates in 15 markets across Asia-Pacific. It benefits from a deep history and a very strong market presence. The purchase will certainly enhance Prudential’s market position, and it will give it leading positions in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand, and the Philippines. The merger would also make it more difficult for the smaller players to compete, given the combined entity’s dominance.
Moody’s believes the Prudential/AIA Group transaction is the largest-ever merger and acquisition (M&A) deal in the insurance sector. A number of financial services groups that have been hurt by the financial crisis are now evaluating their business strategies, including the possibility of divesting their non-core and insurance businesses. They are also evaluating their strategies in different regions in order to better position themselves for the future – once the crisis has abated.
As capital market funding and valuations improve, Moody’s expects an increasing number of M&As over the next 12-18 months. Further consolidation in the insurance industry is likely, so that companies can achieve better economies of scale and operational efficiencies.