AIG Snares American General

American International Group Inc.’s (AIG) successful $24.6 billion bid for Houston-based American General Corp. in May shut the door on an earlier bid by Britain’s Prudential PLC. The British offer was originally higher, at $26.5 billion, but its stock swooned after news of the deal broke, reducing the value of its bid to $20.6 billion. AIG Chairman and CEO, M.R. Greenberg, said, “The acquisition of American General will significantly strengthen our position in the domestic life insurance market. In addition, American General’s annuity businesses will complement AIG’s existing retirement savings business, giving us an even stronger platform from which to capitalize on the significant growth we see in retirement savings.” But the flirtation with Prudential will cost American General a $600 million termination fee. After combining operations with American General, AIG will get about 50% of earnings from life insurance, 35% from property-casualty operations, and 15% from financial services. AIG is the world’s largest insurance company, when measured by market value. “Anytime you make an acquisition there are risks, but the American General deal has mostly positives for AIG,” says Stephen Musser, an insurance industry analyst at A.G. Edwards & Sons. Some observers have questioned AIG’s ability to successfully integrate American General while it is still in the process of absorbing its 1999 acquisition of insurance company SunAmerica Inc. But Musser says that he expects AIG to finish its integration of SunAmerica and begin its blending in of American General without any serious snags. AIG has been primarily a property-casualty firm, but with the addition of American General it will increase its life insurance and retirement savings business. Musser says that this could present some problems for the company since it will increase its life annuity business, which is tied to the performance of the equity markets. Nonetheless, Musser thinks that opportunities such as the chance to build its position in the asset accumulation market and the projected 30 to 35 cents per share in immediately accretive earnings more than outweigh concern about the uptick in exposure to stock market cycles. The pact faces little possibility of being tied up by regulators, according to Dendra Lambert, an analyst at J.J.B. Hilliard/W. L. Lyons. “This is a very fragmented industry so we don’t expect the deal to face any significant regulatory hurdles,” she states. Lambert adds that she favors the deal with AIG over an American General/Prudential combination because “in general, American shareholders are more comfortable with transactions in which the buyer is also an American company.” The Lyons analyst says that the deal’s multiple, which she pegs at 14.2 times American General’s expected 2001 earnings, is in line with other recent industry transactions.