Prudential and Aviva draw battle lines in global insurance war

By Jamie Dunkley and Kamal Ahmed Published: 7:34PM GMT 06 March 2010

Tidjane Thiam, arch comparison manager of Prudential, and Andrew Moss, his reflection at Aviva.

"These are dual companies that are domicile names opposite the region. This is an event for a British association to turn a heading monetary services commercial operation on a tellurian scale - it is a extensive understanding that has unequivocally low risks and is great story for the UK."

Prudential"s indicate for AIA sent shockwaves opposite the commercial operation universe when it was voiced last Monday. The understanding will see Prudential turn the largest unfamiliar word organisation in Middle East and one of the world"s heading monetary institutions if it is finished after this year.

Prudential arch Tidjane Thiam is receiving the risk commercial operation to a sum new impassioned Prudential: key sum Mark Tuckers fitness binds to the finish at Prudential Prudential in talks over collateral raising to monetary bid for AIGs Asian operations Prudential admits eyeing AIG resources as it reassures investors FTSE 100 rises in early trade

However, fears over the distance of the understanding and the record-breaking $21bn rights issue that will square account it sent shares acrobatics over 20pc prior to prolonged after it was announced, with commentators describing it as the biggest play in the insurer"s 162-year history.

Andrew Moss, arch comparison manager of the Prudential"s largest done at home opposition even described it as "audacious" as transparent vital lines were drawn in in in between the dual companies, that roughly assimilated in 2006. While Prudential believes the easterly is the future, Mr Moss has insisted that Europe will broach majority of Aviva"s destiny expansion as the "baby boomer" era moves in to early early retirement opposite the continent. The subject is now: who"s done the right decision?

"All my commercial operation life, I"ve elite to contest in markets that are flourishing fast rather than in markets that are mature," adds Mr McGrath, who assimilated the association in Sep 2008. "Growth in Middle East is driven by demographics, definition mercantile expansion is a obviously determined long-term direction for the region.

"This understanding is a extensive event for Prudential over the middle term, it is not a one- or two-year effect. Buying this singular skill enables us to accelerate the plans to turn some-more concerned in fast flourishing markets, on condition that us with decades worth of intensity growth."

Prudential desired AIA prolonged prior to Tidjane Thiam took over as the arch comparison manager in October.

His prototype Mark Tucker had plainly dreamt of formulating an Asian monetary superpower and pounced when AIG ran in to difficulties last year. His try to buy the commercial operation unsuccessful since the US Federal Reserve, that had pumped $182bn in to AIG, longed for to redeem money in the AIG investment. At the time Prudential"s shares were trade at about 200p, definition the insurer would not be means to lift sufficient money by a rights issue. In the teeth of the monetary crisis, Mr Tucker had to desert his plan

Talks in in in between the dual parties recommenced in Dec when AIG, that was deliberation floating the Asian arm, got behind in hold with Prudential. After 3 months of talks Prudential was eventually means to betray the understanding to a repelled marketplace early last week.

To monetary the deal, Prudential will hold a rights issue that some-more than doubles the marketplace worth and quadruples the share capital. Analysts design the issue to be labelled at around 140p, a 40pc bonus to the fanciful ex-rights cost of 230p and a 75pc bonus to Prudential"s 602p share cost prior to the understanding was announced.

Shareholders will be charity 4 new shares for each one they hold, creation it proportionately a far incomparable fundraising than possibly Lloyds Banking Group or HSBC the subsequent largest issues. There will be a serve issue of an one more $5.5bn in new shares to AIG and $5bn of hybrid debt instruments. A serve $5bn of comparison debt is being lifted to account the purchase.

Mr McGrath insists that the share charity does not intermix shareholders" land as prolonged as they practice their full right, nonetheless analysts desire to differ.

"This is structured as a rights issue, this is not dilutive to the exisiting shareholders supposing they take up the rights," he said. "There"s been a little things combined that indicate this is extravagantly dilutive. It isn"t as prolonged as shareholders take up their rights."

The financing was put together in the five days heading up to the proclamation last Monday, with the 3 largest shareholders, together with Capital Group, brought in to the double behind during the week, pronounced one figure concerned in the deal.

The Qatar Investment Authority, one of the emperor resources supports committed to underwriting the understanding along with GIC, the Singapore fund, was in addition consulted. It is the largest shareholder in Credit Suisse, that is advising on the deal.

"AIA has extensive name approval and a great brand," Mr McGrath says. "Were it not for the actuality that AIG got in to such a disaster in their monetary products trade we would probably not be means to even anticipate the squeeze of the commercial operation in this way. It is a singular event that has been combined by the crisis, and it has come together in a approach that is great for the Prudential."

Prudential leads the marketplace in 7 of the thirteen Asian countries it operates in, with Prudential Corporation Middle East delivering �713m in new commercial operation increase for the association in 2009. AIA is in addition additionally clever in this area, holding a heading on all sides in 6 out of the fifteen Asian countries it is formed in. These embody countries such as Thailand and the Philippines, where Prudential is penetrating to enhance the business.

"What is engaging with the fit with AIA is that in majority of these territories where we are in the lead they don"t have a really large commercial operation and clamp versa," Mr McGrath said. "So don"t think about this as a partnership of equals, of dual businesses of identical distance in each of these countries. Where we are clever they are less so, for e.g. in Thailand, AIA are, by far, the marketplace leader, since we are sincerely small. So you can see that putting those businesses together is a comparatively candid proposition. The retreat would be loyal in Indonesia, where we are series one.

Yvette Essen, head of marketplace research at AM Best, says South-east Middle East has weathered the mercantile downturn improved than majority alternative regions opposite the world.

"South-east Middle East is home to a little of the majority sparkling and fast building word markets. Indonesia, Malaysia, the Philippines, Thailand and Vietnam indicate challenging prospects for growth, carrying improved than majority alternative countries," she said.

"This segment has learnt lessons from the Asian monetary predicament in the late 1990s, and subsequently strengthened the regulatory and governance frameworks. Lending practices here have in addition been less worldly than in the West, so the stroke of the credit predicament has been some-more contained.

"As a whole, word markets in Middle East are approaching to redeem some-more fast than majority of the world"s some-more grown word centres, due to their low word penetration, flourishing resources and an augmenting recognition about the benefits of carrying insurance.

"Insurance invasion here is really low the sum volume of word combined in Indonesia, Malaysia, the Philippines, Thailand and Vietnam was worth less than 5pc of each country"s sum done at home product in 2008."

Across the region, majority insurers sell products by partnerships with banks and approach sales forces well well known as agents. Despite this, Ms Essen warns that affordability stays a vital hurdle, as majority people possibly simply cannot means to buy word products or it is not a priority for them.

"Indonesia, is the fourth-largest nation in the universe by population, but half of that race is estimated to be vital on less than $2 per day," she adds.

Prudential will in addition have to fastener with the complexity of operative opposite so majority opposite markets and integrating AIA"s outrageous workforce in to the business. Mr Thiam was in Middle East last week assuring staff at both companies that pursuit cuts would be limited to behind bureau operations at both insurers.

Australia, New Zealand, South Korea and Taiwan are rumoured to be markets Prudential might confirm to leave once the understanding is completed, nonetheless Mr McGrath has done it transparent that Prudential doesn"t have to sell resources to account the deal.

As Prudential goes in poke of eastern promise, Aviva believes Europe stays the majority tasteful word marketplace for growth.

"Tidjane is a really means guy," pronounced Andrew Moss of Aviva, addressing the media as the insurer reported the full-year formula on Thursday. "I promoted him to the house at Aviva and instruct him all the most appropriate with the deal."

However, statute out a likewise mutation understanding for Aviva, he added: "We are a really opposite commercial operation and I wouldn"t wish to put all my eggs in one basket.

"Very couple of resources come up for sale in Middle East and when they do they are costly since of expansion expectations. The scale of event here in Europe should not be underestimated comparison people in Europe have copiousness of savings, that they can put in to the early early retirement products we offer."

"There are transparent differences in in in between Aviva and Prudential," combined Mr Moss. "I don"t think these arguments are new."

Mr Moss" comments were dirty with irony since that Mr Thiam was once arch comparison manager of Aviva"s European business. However, it in addition serves as a sign that Aviva and Prudential are dual really opposite word companies.

Back in 2006, Aviva deserted a �17bn takeover bid for Prudential after unwell to remonstrate the company"s house that a understanding was the most appropriate option. Since then, Prudential has regenerated the fortunes and right away has a share cost and marketplace capitalisation incomparable than the rival.

Mr Moss has pinned his repute on the One Aviva, Twice The Value plan he launched after receiving over from Richard Harvey in Jul 2007. The restructuring programme includes the prejudiced floatation of Delta Lloyd, the Dutch unit, a inventory on the New York Stock Exchange and �500m in costs savings. Aviva"s house and investors will be penetrating to see the ripened offspring of these changes in 2010.

Mr Moss" effect for Europe comes as no warn to anybody who knows Aviva well. Under the stewardship of Andrea Moneta, continental Europe right away contributes �13.5bn in hold up and grant sales alone to the organisation and is seen by majority as the golden crow on the change sheet.

Aviva is Europe"s fourth-largest insurer with a marketplace share of 5pc. Although it competes in the marketplace with incomparable rivals such as Axa and Zurich, the association says European resources are approaching to grow by $1.7 trillion and wants a square of the action. On Thursday, Mr Moneta said: "Europe is entrance together politically and in conditions of law and we are unusually positioned to great from this."

Although European word markets are far some-more grown up than those in Asia, analysts point out that Europe offers evident worth rather than destiny riches. With marketplace invasion reduce amongst eastern retard countries it in addition offers great expansion potential.

Barrie Cornes, researcher at Panmure, says investors should switch from Prudential to Aviva "given the investment risk" of the AIA deal. "We hold that Prudential is profitable a abounding cost for AIA," he adds. "We think the share cost will be flighty over the subsequent couple of months. Further out, to clear one after an one more tenure at the stream share price, we hold that markets will need to urge and government will need to govern a text integration."

This week is an one more critical one for Mr Thiam, who will residence UK investors uninformed from a tiresome debate of both Prudential and AIA"s businesses in Asia. At slightest dual vital institutions and well well known to have lifted concerns about the $35.5bn merger and are deliberation hostile the large rights issue.

However, Prudential"s bankers, led by Credit Suisse, have widespread the risk of underwriting the fundraising between thirty one more lenders, together with GIC, promulgation a poignant summary to Prudential"s house that the understanding will go ahead.

In the short term, Aviva should great as doubt surrounds Prudential. The association in addition looks set to great from the clever opening of the European operations and restructuring programme that Mr Moss has driven through.

However, the mental condition of an Asian monetary superpower, that proposed with Mr Tucker and right away lies with Mr Thiam could propel Prudential serve in the prolonged tenure if the rarely regarded, nonetheless comparatively fresh arch comparison manager can successfully expostulate by the word understanding of the century.