Manulife May Buy AIG

If Manulife does bid on AIG’s assets, it would bring “scale and earnings and all those good things” to the company, says Tom MacKinnon, a financial analyst with Scotia Capital. “AIG has a good U.S. annuity business, a good U.S. insurance business and a great global Asian business,” he says. “I can see them being interested in all parts of that.”

The Asian insurance business is particularly significant; if Manulife takes over AIG’s operations in Asia, it’d become the leading insurance company in the Far East. “Manulife is already well positioned in Asia, but so is AIG,” says Jukka Lipponen, an analyst with U.S.-based Keefe, Bruyette & Woods. “If they could get that business, it would establish them far and away the leader in Asia.”

Andrew Kligerman, an analyst with UBS Securities, says on paper AIG owns only a small portion of the life market in Asia — about 3% in Japan, for example — so it wouldn’t take much for Manulife to become the top insurance company in that region. “It’s a situation where these markets are fragmented and foreigners have rather small stakes. So even though AIG doesn’t have huge market share there, they’re often the leader in many markets.”

As for U.S. assets, Manulife has indicated in the past that it is open to expanding its American business. In particular, the company would probably go after AIG’s life operations. “If they bought this, it would make Manulife a much bigger player in the U.S. than it is already,” says Lipponen. “But on the other hand, AIG has a lot of stuff in there that Manulife is not particularly interested in.”

But even though it might not want certain parts of the business, such as AIG’s property and casualty arm, buying the troubled company would make Manulife the biggest insurance player in the U.S.

In the variable annuity market, AIG is ranked seventh in sales, while Manulife sits in the 11th spot. Together, they’d be the largest player. AIG is tops in other areas such as fixed annuity and term life, so if Manulife bought those areas of the insurance company’s business, it’d automatically be number one.

Kligerman says that even if Manulife purchases AIG, it still won’t own more than 10% of market share in the competitive insurance space, so anti-trust issues won’t come into play.

One part of the business Manulife may try to avoid is AIG’s European operations. Lately, the Canadian company hasn’t been interested in expanding to Europe — it actually pulled out of that part of the world a few years ago — so if its purchase includes that part of the business, it might try to sell it off to another company fairly quickly.

South America is another undesirable spot Manulife might end up with if it buys a large chunk of the faltering insurance company. “I don’t recall management ever having expressed an interest in South America,” says Lipponen. “But sometimes, especially in circumstances like these, you have to buy something you wouldn’t necessarily want. But if it’s a small piece of what you bought and the valuations are there, it might make sense to do it, even if you end up shedding the piece you don’t want to keep.”

Clearly, there’s hardly a downside to Manulife’s buying AIG, though the company will have to pick up its damaged derivates book if it purchases the entire business.

Because of this, Lipponen thinks that the company will opt to buy pieces of AIG instead. “Manulife has been a very disciplined buyer throughout the years,” he says. “They’d have to put a different kind of deal together if they buy the whole thing because you’d have to have buyers for the pieces that they don’t want. What would you do with AIG’s financial products that have the derivates book?”

Kligerman thinks AIG has “terrific” assets and that any company would be wise to bid on them, though he admits that whoever winds up with the company will inherit the same issues that put it on this downward spiral in the first place.

“You would have to have the knowledge that you’re buying a company that has value, despite the potential losses on credit default swaps,” he explains. “And there will be losses on some of the investments, but then again, some people argue that the investment losses are only temporary and will be reversed over time.”

It’s still too early to tell how this will play out, but it’s safe to say that Manulife will bid on AIG only if the price is right. But with AIG’s stock price tanking and the business essentially finished, there’s a good chance that one of North America’s insurance players will scoop up AIG’s assets, and Manulife may have the best chance to benefit.

“Manulife’s market cap would exceed any of the U.S. players’ at this time,” says Kligerman. “By use of their stock as currency, or maybe any cash they have, it could work.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com