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Prudential PLC (PUK) said Thursday it will buy SRLC America Holding Corp. from Swiss Re AG (SREN.VX) in a GBP398 million (US$621 million) cash deal, continuing its strategy of making bolt-on acquisitions after its bruising failure to buy AIA Group Ltd (1299.HK) two years ago.
The move will increase the U.K. insurer's presence in the U.S. while immediately boosting its earnings there.
Swiss Re plans to use the proceeds and capital freed by shedding this business to back more profitable activities, including its main reinsurance operations. The Zurich-based reinsurer will record a loss against second-quarter earnings of around $900 million from the deal because the business carries a higher value in its books than the selling price.
The price of the acquisition is much smaller than Prudential's failed $35.5 billion attempt to buy Asian rival AIA Group.
SRLC is a life insurance business that is part of the U.S. division of Swiss Re's Admin Re. Its primary operating subsidiary is Reassure America Life Insurance Company, which has a diverse portfolio of U.S. life insurance businesses.
"This bolt-on acquisition is in-line with our strategy and is a great opportunity to increase the scale of our life business. It is a capital efficient transaction that will produce an attractive internal rate of return and payback period commensurate with what we achieve organically on writing new business," said Mike Wells, chief executive of Prudential's U.S. business, Jackson National Life.
"It helps diversify Jackson's earnings by increasing the amount of income we generate from underwriting activities thereby enhancing the quality of our earnings and our ability to remit more cash to the group," Wells said.
The acquisition is expected to be accretive immediately to Prudential's earnings. Prudential estimated it will lift Jackson's IFRS pre-tax profit by GBP100 million in the first year of ownership.
Following the acquisition, Prudential is increasing its 2013 Jackson annual net remittance target from GBP200 million to GBP260 million a year.
The purchase diversifies Prudential's earnings base by increasing the profit that Jackson derives from insurance income, it said. Swiss Re will retain a portion of SRLC through reinsurance arrangements to be undertaken prior to the deal's completion.
The deal, which is subject to regulatory approval, is expected to be completed in the third quarter of this year.
Swiss Re said it is getting cash proceeds of around $900 million, consisting of the purchase price plus around $300 million in dividends. SRLC is a business that has grown over the years through multiple purchases of closed life and health books.
Oriel Securities analyst Marcus Barnard said: "This looks like an extremely attractive deal and is very financially enhancing. We can expect upgrades of 2%-5% to embedded value and earnings."
"This is completely in line with its U.S. strategy of making small bolt-on acquisitions. The last of these was Life of Georgia which was announced in November 2004, and cost GBP137 million. This was an extremely successful and enhancing deal for Jackson," Barnard said, keeping his buy rating on the stock.
At 0744 GMT, Prudential shares were up 0.7% at 678 pence. Swiss Re shares rose CHF0.50, or 0.9%, to CHF55.50 at the opening Thursday. The stock has gained 22% so far this year, outperforming the European industry average, with the Stoxx 600 insurance index up 1.6% in the five months to end May.
-By Vladimir Guevarra, Dow Jones Newswires; +44 (0) 2078429486, email@example.com; Twitter: @Vlad_DowJones
(Anita Greil in Zurich contributed to this article.)