Prudential Financial Inc. said the two Japanese life insurance units it’s buying from American International Group Inc. will earn less investment income because of the acquirer’s lower tolerance for risk.

AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. would have earned about $100 million less on investments last year if Prudential were managing the portfolios, Mark Grier, vice chairman of the Newark, New Jersey-based insurer, said today on a conference call with analysts. Prudential will be initiating a “repositioning of the investment portfolio in a manner more consistent with our risk appetite,” Grier said.

AIG, brought to the brink of collapse in 2008 when investments soured, is now selling units to repay a U.S. rescue. The company accumulated $1.3 billion of Greek sovereign debt in a unit it’s selling to MetLife Inc., the only U.S. life insurer bigger than Prudential. In that deal, announced in March, AIG agreed to shoulder as much as $450 million of losses tied to bets it made on Japanese commercial mortgages.

Stock Falls

Prudential fell $2.49, or 4.4 percent, to $54.03 at 10:58 a.m. in New York Stock Exchange composite trading. The insurer was the biggest decliner on the Standard & Poor’s 500 Index. Prudential said today it plans to issue $1.3 billion in equity to help fund the AIG deal.

Prudential, led by Chief Executive Officer John Strangfeld, is buying Star and Edison from New York-based AIG to expand in the world’s second-largest life insurance market. The insurer, which entered Japan in 1987, will pay $4.2 billion in cash and $600 million in debt. It expects pretax expenses of $500 million over five years to integrate the businesses and annual savings of $250 million, according to a slide presentation.

“Pru has been a very large Japanese life insurer,” said Randy Binner, an analyst with FBR Capital Markets, who has an “outperform” rating on Prudential shares. “They think they know that market very well and they’re comfortable there. They see an opportunity to build.”

Prudential and New York-based MetLife, which have competed for U.S. sales for more than a century, are extending their rivalry in Japan as bailed-out rivals retreat. MetLife’s acquisition of AIG’s American Life Insurance Co. will add more than $7 billion of annual revenue in Japan to a non-U.S. business that reported $5.5 billion of revenue in 2009.

AIG Bailout

AIG CEO Robert Benmosche, 66, agreed with U.S. regulators today on a plan to repay the company’s bailout. The Treasury Department will convert its preferred stake of about $49.1 billion for 1.66 billion shares of common stock and then sell the holdings in the open market, AIG said in a statement. The Prudential deal is slated to be Benmosche’s second-biggest divestiture after the $15.5 billion Alico sale.

“The latest sale is evidence of how AIG is steadily but surely carrying on with its restructuring plan,” said Naoki Fujiwara, a chief fund manager in Tokyo who helps oversee $6 billion at Shinkin Asset Management Co. “The question would be how Prudential will be able to utilize the acquired units in a country where growth is limited.”

Japan accounted for about 17 percent of the world’s life insurance sales last year, according to a study by Swiss Reinsurance Co. Premium volume was $399 billion in 2009, down 0.8 percent when adjusted for inflation, Swiss Re said. In the U.S., the world’s biggest market, premiums dropped 15 percent to $492 billion, according to the Zurich-based reinsurer.

Bank of America Corp., Barclays Plc, Nomura Holdings Inc. and Perella Weinberg Partners LP are advising Prudential on the deal. Debevoise & Plimpton LLP is legal counsel. AIG is getting advice from Goldman Sachs Group Inc. and JPMorgan Chase & Co., and Simpson Thacher & Bartlett LLP and Nagashima Ohno & Tsunematsu are legal counsel

Strangfeld is spending capital that Prudential accumulated after the 2008 credit crunch interrupted insurers’ traditional sources of funding. Prudential slashed its dividend two years ago and in 2009 sold a stake in a securities brokerage for $4.5 billion. As the crisis eased last year, Strangfeld, 56, also sold equity and debt.

MetLife Expands

MetLife CEO Robert Henrikson, 63, sold stock in 2008 and agreed to the firm’s biggest deal to expand beyond a U.S. life insurance market that he described this year as “relatively slow-growth.” MetLife is picking up Alico’s businesses from Argentina to Russia to Qatar, including the Japan operation that Chief Financial Officer William Wheeler called a “cash machine.”

Henrikson and Strangfeld shunned government bailouts last year, while rivals Hartford Financial Services Group Inc. and Lincoln National Corp. took U.S. capital injections. Hartford, based in the Connecticut city of the same name, was hurt by investment declines and retreated from Japanese and European markets to concentrate on U.S. operations. Philadelphia-based Lincoln sold a U.K. unit and an asset manager.