Its payback time for A.I.G. The American insurance giant is selling its Asia insurance business to Prudential PLC, the British insurance major, for $35.5 billion. The sale of the Hong Kong based American International Insurance, or A.I.A., would allow A.I.G. to repay a part of the $180 billion that it got from the US government at the peak of the financial crisis.
According to the Wall Street Journal, the deal would involve $25 billion in cash and $10.5 billion in stock. Almost $16 billion of the proceeds from the sale would be used to buy back the preferred shares in A.I.G. that the government had bought as part of the bailout package. The remaining amount would be used to partially pay the $25 billion outstanding debt that A.I.G. owes to the New York Fed.
Prudential Looking at Asia for Growth
Prudential PLC is already a major player in the Asian market with more than 11 million customers. With this deal, it would further strengthen its presence in emerging economies like China and India. The region is seen as a major growth driver for insurance business as the markets in the developed countries are saturating while insurance penetration rates in Asia are at extremely low levels.
Prudential would pay for the cash component of the acquisition by raising $20 billion through a rights issue and $5 billion as debt. The news however did not go down well with some analysts, who downgraded Prudential stock. The stock took a beating and fell by almost 12% on the London Stock Exchange.
Repaying U.S. Taxpayers
A.I.G.’s chief executive, Robert Benmosche, said that the company has agreed to the deal as it is going to be a faster way of paying back the bailout money that came from the U.S. taxpayers. He said that it was a better alternative than going for an initial public offering for A.I.A. He also emphasized that the deal would give A.I.G. more flexibility as it continues its efforts to repay the U.S. government.
Both the taxpayers and the government will now be hoping that the ‘too-big-to-fail’ company would finally get its act together and repay the rest of bailout money soon. That target is still quite far, but A.I.G.’s move at least shows that it has the right intent and is ready to monetize its business units to raise money.
However, in the long term the company could be doing damage to itself by quitting a high growth market like Asia. Hopefully, A.I.G. has a strategy in place to counter this damage.