AIG's Departure Creates New Challenges in Japan's Life Market

American International Group Inc.'s divestiture of its life insurance businesses will reorder the market for foreign insurers in Japan, where AIG had built up a substantial presence while challenging traditional local insurers.

U.S.-based Prudential Financial Inc. and MetLife Inc. will take over AIG's three life units in Japan by the end of this fiscal year, assuming all requirements of the deals are met. The combined forces of Prudential with AIG Star and AIG Edison, and MetLife with Alico will mark a shift in the competitive market.

The acquisitions "should make Prudential the largest foreign life insurer in Japan, vaulting it into fourth place above Sumitomo Life," in Japan's life sector, said Clark Troy, senior analyst of business consultancy Aite Group. Prudential will be able to make use of the scale offered by its well-established brands in Japan, said Troy. In products development, Troy said the insurer may see the appreciation of yen as an opportunity to market foreign currency-denominated products using U.S. and Australian dollars and euros.

However, the expansion in Japan may constrain Prudential from moving effectively into other faster-growing Asian markets where AIA, the U.K.'s Prudential plc, Axa, MetLife through its planned-to-be-acquired Alico and Allianz "should be positioned to move more nimbly," said Troy.

The combined forces of MetLife and Alico will also place the new entity in a good position to market new products and distribution channels. A Metlife spokesperson said the deal is on track and the company's Japanese brand name will be MetLife Alico.

In Japan, foreign insurers are looking into new approach to consumers with a strategic focus on untapped channels strategy but simple products offering, said Neil Katkov, senior vice president and head of Asia at consultancy Celent. Japan is an attractive market for foreign insurers with a strategic focus on new opportunities, said Katkov. Although life premium income continues to fall across the industry, some players such as foreign insurers, small niche entrants and low-cost competitors have used new strategies to increase revenue. Foreign insurers have been able to compete effectively, armed with products and distribution innovations, such as annuities and third-sector cancer insurance. After the collapse of the variable annuity market due to the global financial crisis, Katkov said Japan has a strong need for savings and investment product innovation.

He said "it makes sense" for foreign insurers to pursue further opportunity in Japan, which has a demographic and consumer segment similar to their home markets. Compared with emerging markets, Japan's developed nature and rules are well understood. Foreign insurers' share of Japan's life market was more than 30%, according to Katkov. At its peak, AIG's three life subsidiaries had more than 12% of the life insurance market share in Japan.

Changing market conditions are pressing local life insurers to pursue new strategies. Life insurers are teaming up with nonlife affiliates to optimize existing channels for cross-selling of products.

MS&AD Insurance Group Holdings. Ltd. plans to integrate its two life subsidiaries Aioi Life Insurance Co. Ltd. and Mitsui Sumitomo Kirameki Life Insurance Co. Ltd. in October 2011. MS&AD said the merger is to take advantage of an expanded base of operations with offerings of products through financial institutions, agents, direct sales channels and cross-sales to existing nonlife customers of the group.

Meanwhile, Dai-ichi Mutual Life Insurance Co. Ltd. demutualized to a stock company with a listing on the Tokyo Stock Exchange as part of its long-term growth strategy of domestic and international expansion (BestWire, April 1, 2010).

AIG Star and AIG Edison will be sold to Prudential Financial for US$4.2 billion in cash, and Prudential will assume US$600 million in third-party debt under the agreement with AIG.

With about 200 offices, 4,600 consultants and 10,000 agents, Alico is AIG's biggest life operation in Japan. It reported premium income of 862.9 billion yen (US$10.4 billion) and net income of 48.5 billion yen in the 2009 fiscal year.

The AIG Star and AIG Edison sales to Prudential are expected to close in the first quarter of 2011, subject to regulatory approval and other closing conditions.

AIG Star reported premium income of 183.9 billion yen and net income of 6.5 billion yen in the 2009 fiscal year ended in March. AIG Edison's premium income and net income were 251.5 billion yen and 14.8 billion yen, respectively.

AIG's Exit

Japan is the only market in Asia where AIG has been able to make progress on the divestment of its life insurance assets. In Taiwan, AIG's agreement to sell its life unit Nan Shan Life Insurance Co. Ltd. to a Hong Kong consortium was rejected by Taiwan's regulators (BestWire, Sept. 22, 2010).

AIG's Asian life subsidiary, AIA Group, plans an initial public offering of stock on Hong Kong's Stock Exchange after U.K.-based Prudential plc. failed to acquire the company in June (BestWire, June 7, 2010).

"There is definitely some urgency for both AIG and for the [U.S.] government to make progress in consolidating and simplifying their exposure to one another," said Troy.

The sale of AIG Star and AIG Edison represents another step in AIG's program to repay U.S. taxpayers and a key milestone in achieving a complete exit of government support, said AIG in a statement.

Ahead of the U.S. mid-term elections, Troy said "the government wants to tack up as many wins as it can," and "progress on AIG is both a good milepost and crucial component of its recent largely positive assessments of TARP [Trouble Assets Relief Program] as a whole." A recent report on TARP by the U.S. Treasury concluded that the cost of AIG's government bailout to U.S. taxpayers will be as little as US$50 billion.

AIG's restructuring plan assumed that the Alico, AIG Star and AIG Edison transactions will go through and that the AIA IPO will be successful. "Recent announcements of cornerstone positions by Fairholme Capital, the Kuwait Investment Authority and others in the AIA offering raise probability of its success, albeit at a lower valuation than had been hoped," said Troy.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

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