Snoopy's hungry

Insurance M&A: Insurance companies have been badly battered by the financial crisis. So it’s a good time for solid US outfit Metlife to go shopping. The insurance company’s strong balance sheet means it is better placed than rivals to take advantage of low valuations across the sector. AIG’s sale of its international life insurance business, Alico, looks like an ideal target: the sale is forced and the fit is good.

Metlife had $38 billion of cash and short-term investments at the end of the first quarter. And cash continues to pour in as risk-averse customers flee to insurers with the best balance sheets — the company’s annuity sales in the first quarter were $7.4 billion, more than double the amount in the same period last year.

Of course, much of this cash pile is off limits — it is set aside for paying claims, and markets remain unstable. But Metlife estimates it has excess capital of around $5 billion, which is far greater than most rivals. And garnering more funds shouldn’t be hard. Since mid-May, insurers have raised about $15 billion in capital, according to JPMorgan research.

Metlife is spoiled for choice. Insurers traded at about 1.5 times book value before the crisis. Now, they trade pretty much at book. It seems unlikely this figure will recover fully — financial companies must now keep more capital on their books and further hits to assets such as commercial real estate holdings look likely. Nonetheless, valuing these businesses at replacement cost seems too conservative over the long run.

So why Alico? Metlife wants to expand its international business. It currently represents about 15 per cent of the company’s earnings and has been expanding steadily. Overseas margins are higher, and unlike the mature US market, life insurance in places such as India and China is growing quickly.

The sticking point in previous talks was price. Alico earned $1.3 billion in 2008 before capital losses. AIG reportedly demanded $20bn. It’s understandable why Metlife walked at that price. Put the earnings on a multiple of ten — which assumes earnings are stable — and add a 30 per cent control premium, and you get to $17 billion.

Metlife should be able to negotiate a lower price. Its target’s business has clearly been damaged. Widespread anxiety last year in Asia over AIG hurt the company’s reputation. And it is under intense pressure to sell — while Metlife could always walk away. Metlife is in a good position to snap up this collection of assets if the price is right.