It doesn't add up

The Pru deal with AIG and the US Government has all the hallmarks of an ego-enhancing, value-destroying bid. AIG's Asian assets are in SE Asian markets where economic growth prospects are highly valued. The premium to UK valuations looks about 50%, the UK being close to long-term fair value and emerging markets generally over-discounting higher growth potential. Hong Kong and mainland China companies are valued at around 3 and 5 times book value respectively because of the growth potential. But to pull this through to EPS and therefore future investor returns without dilution requires superior profitability. For non-insurance businesses this is feasible but unlikely whereas for long-term insurers, constrained by country-specific regulatory capital regimes as well as by both domestic and international competitive arbitrage, it is inherently implausible. As far I can see there is no general body of specialist insurance research that has suggested that realising the top-line growth potential in Asia without dilution is feasible. On the contrary, building up a general picture from cursory research into local conditions suggests there are plenty of challenges for management on both the asset and liability side of the balance sheet. We might also assume that the US Government was not in such a weak position that it needed to sell control of the AIG Asian subsidiary to Pru for much (if any)less than it was planning to float 50% in HK. Pru says it is getting a high-growth business on the cheap. I'm no expert in insurance but I do spend my time valuing countries and it doesn't seem to me to add up. What am I missing, I wonder.

Posted by: Stuart Fowler