Britain’s Prudential To Buy Am Gen In Biggest Insurance Deal Ever

Last January Prudential plc Chief Executive Jonathan Bloomer indicated he was still looking for opportunities in the U.S. The search culminated March 12 in Houston with the announcement that Britain’s venerable “Pru”—which has no connection with America’s Prudential Insurance Co.—would acquire American General Corp., the United States’ second largest publicly held life insurer, for the equivalent of $26.5 billion in stock.

Under Bloomer’s leadership the 150-year-old Pru has aggressively expanded in Europe and Asia, adding new pension and financial management products to its basic life insurance business. Three years ago it launched “Egg,” an online bank.

The insurer’s main U.S. presence, however, consists of subsidiary Jackson National Life. Ranked 20th in size, with $7.2 billion in gross sales last year, it’s considered too small an operation to achieve the market share and economies of scale necessary to compete on equal terms with the biggest life insurers, and to enable Pru to become a viable player in the U.S. market.

Joining with American General—total assets in excess of $120 billion, 16,000 employees and over 12 million customers; gross revenues and deposits of over $22 billion last year—will change that. The Houston headquarters oversees a nationwide network, providing retirement plans, life insurance, consumer loans and investment management. The merger announcement, asserts that it’s: “The third largest writer of annuities; the leading provider of fixed annuities; the second largest issuer of life insurance policies; the seventh largest life insurer by new life premium sales; and a leading provider of real estate and consumer loans through the third largest consumer finance branch network in the United States.”

Prudential/Am Gen would rank as the world’s sixth largest insurance group with combined capital of over $45 billion and assets under management totaling $336 billion. This financial clout and extended operating network, places it on a par with France’s AXA, Germany’s Allianz, Holland’s ING and Aegon, and the U.S. giants, AIG, Chubb, Met Life, etc.

The merger plan calls for Am Gen shareholders to receive 3.622 new Pru shares for each Am Gen share, valuing them at $49.52, nearly a 30 percent premium above the recent $38.25 closing price, and double the value of a year ago. By comparison ING’s recent purchase of ReliaStar carried a 17 percent premium.

While billed as a “merger of equals,” the eventual ratio of the combined companies would be 50.5 percent Pru to 49.5 percent Am Gen. Bloomer will head the group from Pru’s London offices. Am Gen CEO Robert M. Devlin will join Pru’s Board as Deputy Chairman and CEO of North American operations, headquartered in New York. Operational centers will remain in Houston and Lansing, Michigan.

Industry analysts generally agree that the two companies, who started as classic life insurers, but have expanded into other fields, are highly compatible. Bloomer certainly sees it that way. “Our two companies are a great fit,” he said. “We have highly complementary business operations and we have pursued very similar strategies by broadening out our product ranges and distribution channels. Not only will this give us a leading position in the U.S., it also gives us the scale and financial strength to allow for continued expansion and faster growth in the other regions of the world in which we operate.”

Devlin was equally enthusiastic, saying, “As part of an international financial services powerhouse, we will benefit from increased scale and financial resources that will provide a solid foundation for accelerated growth and profitability.” Both men stated that they looked forward to working together.

This compatibility also carries welcome news for their employees. Am Gen spokesman John Pluhowski indicated that while some 225 positions will be eliminated, there are at least 300 openings in Houston alone, and the New York office will require 30 to 40 additional staff. “We will do everything possible to minimize the impact on employees through redeployment,” Pluhowski said.

The only controversy so far comes from financial analysts, who have questioned the premium Pru is paying. Its shares dropped 14 percent when the merger announcement was made, but have since recovered somewhat. The high price not only dilutes existing investors’ stake in Pru, which has made its institutional shareholders unhappy, but also comes at a time when the U.S. economy is slowing down.

Continued strong sales in Europe and growth in Asia may temper this. As Devlin told the BBC, “We’re looking at the longer term in making this deal. Although we acknowledge concerns over the U.S. economy, we believe it is very robust and that this is, in fact, a great time to make the deal.” As usual, time will tell.

Topics Mergers & Acquisitions USA