Consultant: AIA-Prudential Deal Could Prompt Japan Life Mergers

U.K. life insurer Prudential plc's bid to acquire American International Group's [058702] AIA may have provided a boost to the merger between U.S.-based MetLife Inc. [058175] and American Life Insurance Co. [006081], another AIG subsidiary, according to an insurance consultant.

Tokyo-based Neil Katkov, senior vice president and head of Asia at consultancy Celent, told BestWeek Asia/Pacific that the AIA-Prudential merger would prompt foreign insurers in Japan to reconfigure themselves to regain a stronger position as the declining Japanese insurance market undergoes restructuring.

"I think that could reactivate the foreign insurers in Japan, not just MetLife and Alico, but also foreign insurers in general, to gather some new competitive strategies to recapture their market share against domestic market players," said Katkov.

Prior to the Alico-MetLife announcement, Katkov said the AIA-Prudential transaction would "speed up" the merger talks between MetLife and Alico.

On March 8, AIG said it reached an agreement to sell its Alico to MetLife Inc. for about $15.5 billion (BestWire, March 8, 2010). AIG (NYSE: AIG) said the cash will be used to reduce the liquidation preference of the Federal Reserve Bank of New York in the special-purpose vehicle formed by AIG and the Fed to hold the interests in Alico.

Market Renewal

The Japanese insurance industry has been undergoing reform since the 1990s. Yoshida & Partners, a Tokyo-based legal consultant, said in a report that reform began after the amended New Insurance Business Law of Japan was promulgated at the end of May 1995 and became effective on April 1, 1996.

The purpose of the amendment was to enhance efficiency, fairness and soundness of the insurance business for the consumer, protect the policyholder and maintain fair solicitation activities for insurance businesses, noted the legal consultant.

Following the Japanese insurance market's deregulation, foreign life insurance firms moved to Japan over the past decade and took up a "huge" market share of around 25% to 28% of the domestic insurance market, spurring competition, said Katkov.

Japanese insurers, however, have taken the lead in the country again over the past five years, which according to Celent was mainly because the domestic companies have "adopted strategies of foreign firms" and caught up with their foreign counterparts.

Katkov said the global financial crisis has "destroyed" foreign firms in Japan, especially European firms that were hit badly by the U.S. subprime mortgage problem. "Some even cut their Asian businesses or changed their business strategies in Asia," he said.

To save costs, Katkov said some insurers have chosen to "merge to survive," while some took the opportunity under deregulation to develop new sales channels such as bancassurance and Internet distribution.

New Strategies

According to the Foreign Non-Life Insurance Association of Japan, deregulation has been a "slow" process in Japan, with the latest round being the deregulation of bancassurance from December 2007, but there is "no doubt" that it continues to create opportunities in the market for foreign players.

With the regulatory change in the bancassurance sector in Japan, financial consultancy Accenture has indicated that both Japanese and foreign companies "alike agreed" that new growth strategies are needed in this environment, as well as strategies for customers, products and distribution channels.

Pierre-Louis Seguin, a Paris-based consultant at Accenture, said in a report that foreign companies have to "identify their focus for change." Unlike Japanese companies, foreign insurers' focus needs to be on "building strong brands and enhancing distribution" to reach more Japanese consumers more quickly with a compelling offering backed by a strong brand.

For Japanese companies, it is important that they "enhance their capability for product innovation, improve sales effectiveness and enable their work force with new sales-focused applications," said Nobuhiko Watanabe, a Tokyo-based consultant at Accenture.

Companies also need to build their organizational capability to manage change internally, added the Japanese consultant.

Both Japanese and foreign companies have "significant" opportunities ahead, noted Accenture. It said the Japanese insurance market has emerged from a period of "massive and disruptive" change stronger and more able to capitalize on the opportunities presented by impending changes in the insurance market and Japanese society.

Due to the economic downturn and the shrinking life insurance market in Japan in the long run, both foreign and domestic insurers are now focusing more on developing the market of variable annuities, said Katkov.

As of October 2009, there were 42 life insurance companies, including both domestic and foreign insurers, and six domestic mutual companies in Japan, according to the Financial Services Agency of Japan.

(By Rebecca Ng, Hong Kong news editor: [email protected])