* Sale price $4.8 bln, includes $600 mln in debt
* Says will retain its general insurance business in Japan
* Expects to take non-cash charge of $1.2 bln in Q3
* Deal makes Prudential Japan's biggest foreign life insurer (Releads, adds analyst comment)
By Chikafumi Hodo
TOKYO, Sept 30 (Reuters) - Prudential Financial Inc will become Japan's biggest foreign life insurer after clinching a deal for two Japanese life insurance units owned by American International Group for $4.2 billion in cash.
AIG said on Thursday it will sell the two units, AIG Star Life Insurance Co Ltd and AIG Edison Life Insurance Company, to Pru for $4.8 billion, including $600 million in assumed debt, marking another step in its efforts to repay U.S. taxpayers.
The deal will push Prudential's annual Japanese revenue to 1.5 trillion yen ($17.9 billion), giving it enough scale to take on domestic firms that still dominate the world's second-biggest life insurance market.
It also takes it ahead of American Life Insurance Co, which its main U.S. rival Metlife Inc. is expected to buy by the end of the year for $15.5 billion.
"The acquisitions of the two companies will strengthen Prudential's client base in Japan. This could be a threat to domestic life insurers and other foreign insurers here," said Kenji Kawada, a director at credit rating company Fitch Ratings.
When AIG's sale is complete, Prudential will rank 6th among Japan's 43 life insurers, led by Nippon Life Insurance with 4.8 trillion yen in sales. AIG said it will retain and continue to grow its general insurance business in Japan.
The Japanese life insurance market, with 35 trillion yen in annual sales, is mature but still offers growth potential due to its demographic profile, analysts say.
Nearly a quarter of all Japanese are already over 65 and with a tsunami of baby boomers heading into retirement the ranks of retirees is swelling, boosting demand for medical insurance and pension planning.
"There's this feeling that the Japanese market is completely dead and it certainly is very mature from a traditional life insurer perspective," said Makarim Salman, an insurance industry analyst at Macquarie Securities in Tokyo.
"But an ageing population leads to potential growth in terms of medical and savings provisions and that's the angle I think they're approaching it from."
Masahiko Miwa, a senior analyst at rating agency Moody's, agreed, saying Japan offers opportunities in medical and annuity insurance.
"Medical insurance in particular generates higher profit margins. So it is possible there will be some more newcomers in this sector," Miwa said.
GAMBLE
For AIG, the sale marks progress in disentangling itself from the U.S. government, although it still has a long way to go before the taxpayers get paid back in full for their $182 billion rescue package.
Earlier this week, AIG's Asia life insurance business AIA Group began pre-marketing for an IPO that could raise about $15 billion and help AIG repay the U.S. government in part.
The Japan deal, however, is an about turn for the company. In October last year after looking for a buyer for its two Japanese operations, AIG said it had decided to keep the businesses after all because they helped improve corporate value.
AIG expects to take a non-cash pretax goodwill impairment charge of about $1.2 billion in the third quarter as a result of the sale.
While the deal gives Prudential the lead among foreign insurers looking for opportunities in Japan, it is also a gamble.
The downside in Japan is death, because as the population gets older, people are dying at a faster pace. For life insurers that means fewer customers to fight over and more payouts to make. Within half a century Japan's working age population will shrink by 20 million people unless birth rates rise or the country lets in more immigrants.
"It's hard to generate revenue in Japan as life insurers now have to think about paying out more as people become older," a senior manager at a Japanese research company specialising in insurance said on condition he wasn't identified.
"In the past, expanding the client base was the key to grow in this country, but this won't work out in the near future," he added.
Goldman Sachs and JPMorgan acted as financial advisers for AIG. ($1=83.71 Yen) (Additional reporting by James Topham and Junko Fujita in Japan, Sakthi Prasad in Bangalore; Writing by Tim Kelly; Editing by Nathan Layne and Muralikumar Anantharaman)