Dai-ichi Life Insurance Co. (8750), Japan’s second-largest life insurer, is in talks to buy Protective Life Corp. (PL:US) for about 500 billion yen ($4.9 billion), said people with knowledge of the matter.
An agreement between the Japanese insurer and Birmingham, Alabama-based Protective Life may be reached as soon as this week, the people said, asking not to be named because the negotiations are private. Dai-ichi Life said it’s considering buying a U.S. insurer without identifying a target. The company said it may raise funds by selling shares and that no decision had been made.
Japanese insurers are venturing abroad as demand in the domestic market is eroded by the world’s fastest-aging society. The acquisition, if realized, would be the largest takeover of an overseas firm by a Japanese life insurer, according to data compiled by Bloomberg. Previous purchases by Dai-ichi include a stake in Janus Capital Group Inc. in the U.S. and Tower Australia Group Ltd. in 2011.
“Entering the U.S. market has been a goal of Dai-ichi’s for some time,” Makarim Salman and Ken Oiwa, analysts at Jefferies Group LLC in Tokyo, wrote in a note dated today. “We believe they see risks in Japan as the demographic decline could lead to a decrease in the profit base.”
The U.S. accounts for about 22 percent of the global insurance market and is expected to continue growing faster than Japan, according to Jefferies. The deal would boost Dai-ichi Life’s group premium income to about 4.65 trillion yen, on par with its bigger competitor Nippon Life Insurance Co.’s 4.86 trillion yen.
Founded in 1907, Protective Life has added clients across the U.S. with 47 acquisitions of smaller insurers and blocks of policies from other firms over more than four decades, according to its website. It agreed last year to a $1.1 billion transaction to add U.S. policies from Axa SA and expanded in 2006 by buying insurance units from JPMorgan Chase & Co.
Dai-ichi shares declined 5 percent to 1,433 yen at the close of trading in Tokyo, the biggest drop since Feb. 4. The stock earlier fell as much as 8.5 percent after the Nikkei newspaper reported that it plans to sell as much as 200 billion yen of shares to help fund the transaction. The stock is down 18 percent this year, compared with the 10 percent loss by the six-member Topix Insurance Index.
“If the deal goes ahead, given the size, we would expect Dai-ichi to require additional funds and this could be a potential catalyst for an equity raise,” according to Jefferies’s note.
Tokyo-based Dai-ichi will pay a premium on top of Protective Life’s stock price and set up a U.S. special-purpose company to merge with the U.S. insurer, the Nikkei newspaper reported earlier.
Protective jumped 10 percent to $57.75 at 9:57 a.m. in New York. The insurer, with a stock-market value of $4.12 billion at the end of last week, is led by Chief Executive Officer John D. Johns. Management would probably remain in place after a deal, according to Nikkei.
“We believe it’s completely sensible that a large Japanese insurer would consider such a move,” John Nadel, an analyst at Sterne Agee & Leach Inc., wrote in a research note. “We would have thought Protective would prefer to remain independent particularly given a reasonable outlook for continued acquisition opportunities.”
Eva Robertson, vice president for investor relations at Protective Life, said in an e-mail that the company doesn’t comment on rumors.
Protective Life advanced more than 30 percent in the past year to $52.30 at the end of last week, as investors bet the deal with Paris-based Axa would add to earnings. Operating profit increased 35 percent in the first quarter to $96.5 million, Protective Life said last month.
Other Japanese financial firms have looked to the U.S. to acquire units or stakes of companies. Orix Corp. (8591), the Tokyo-based finance and leasing firm, agreed in April to pay about $895 million for Hartford Financial Services Group Inc.’s (HIG:US) Japanese retirement-products business.
Nippon Life invested in Newark, New Jersey-based Prudential Financial Inc. amid the financial crisis. In 2008, Tokio Marine Holdings Inc. completed a $4.5 billion purchase of commercial insurer Philadelphia Consolidated Holding Corp., according to data compiled by Bloomberg.
Goldman Sachs Group Inc. is advising Dai-ichi Life on the deal, and Morgan Stanley (MS:US) is working with Protective Life, two people with knowledge of the matter said.
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