Analysts reacted positively today to news that American International Group proposed to expand its stake in 21st Century Insurance Group by buying the remaining portion for roughly $690 million.
New York-based AIG said last night it has submitted a letter to the board of directors of the Woodland Hills, Calif.-based personal lines insurer, proposing to acquire 38.1 percent of shares publicly held for $19.75 per share in cash.
AIG and its subsidiaries now own roughly 61.9 percent of the outstanding shares, which means that following the deal, 21st Century would become a wholly owned subsidiary of AIG.
The proposed per share price represented a 19 percent premium to yesterday's close and a 25.5 percent premium to the average close over the past year, AIG noted.
Additionally, AIG said the proposed price represented a 19.6-times multiple over estimated 2007 earnings per share for 21st Century.
AIG expects the deal to be implemented through a merger agreement which would be negotiated and approved by a special committee of 21st Century directors who are independent of AIG.
AIG said it is not interested in disposing of its controlling stake in 21st Century, stressing that the sole intent is to acquire the rest of the company.
Reacting to the news, New York-based Standard & Poor's Rating Services said today that it placed the "A-plus" financial strength ratings of 21st Century on CreditWatch with positive implications.
S&P credit analyst Michael Gross said, "Although current details are limited, it is possible that the ratings on 21st Century will be raised several notches if we were to view the group as more integral to AIG."
S&P noted that 21st Century maintains a strong competitive position in the direct-to-consumer auto insurance writer marketplace–driven by more than $1 billion of annual premiums in California and the current execution of a multistate expansion strategy.
Bank of America securities analyst Tamara Kravec said the deal represents a good use of AIG's excess capital.
"As the personal lines market continues to soften, AIG's profitable underwriting opportunities will continue to decline, and choosing acquisitions over writing lower return business is smart business," Ms. Kravec wrote.
She called the price reasonable. "The offering price equates to about 1.8 times 21st Century's 2006 estimated Book Value Per Share, above the current group p-c multiple of 1.6 times," she wrote.
In addition, she said merger integration risk remained fairly low in that the company already owned 61 percent of the target carrier.
AIG Chief Executive Officer Martin Sullivan said the deal was an "opportunity to make a substantial additional investment in a business we know well."
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