Long active in Japan,
Prudential Financial has taken its exposure in the country to a new
level with the acquisition of two of AIG’s life units. The
acquisitions, which will give Prudential the opportunity to gain a
far larger share of Japan’s savings market, have been greeted
positively by analysts. Charles Davis reports.
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aving completed the
acquisition of two life insurers in Japan, US life insurer
Prudential Financial is optimistic about the potential for turning
the legendary Japanese penchant for saving into retirement planning
and financial products.
With more than $15trn in
savings, Japan offers tremendous opportunities for Prudential to
grow in protection products and address retirement needs. This is
particularly true given that nearly half of the total savings is
housed in low-yielding investments such as postal accounts and bank
savings accounts, which the insurer is in a strong position to
poach with the more attractive returns provided by life insurance
products.
Prudential recently closed
its $4.8bn acquisition of AIG Star Life Insurance and AIG Edison
Life Insurance, the Japanese life insurance subsidiaries of
American International Group (AIG) – a deal that marks the largest
acquisition by Prudential since it became a publicly traded company
10 years ago. Prudential, which is the second-largest insurer in
the US, now is the top foreign life insurer in Japan in terms of
policies in force.
Since the credit crisis
forced AIG to seek emergency financing from the Federal Reserve
Bank of New York and the US Department of the Treasury, AIG has
seen selling its much-coveted operations in Asia as a way to raise
the cash needed pay the government back.
Star and Edison are headed to
become subsidiaries of Gibraltar Life when Prudential completes the
legal procedures required to merge the three under the Gibraltar
Life brand. AIG Star and AIG Edison sell life, medical insurance
and annuities to individuals and groups through their captive
agent, independent agent, corporate and bancassurance channels.
Combined, the companies have around 10,400 employees, just under
17,000 captive agents (7,500 from AIG Star and AIG Edison), as well
as 5,500 independent agents.
A long history in
Japan
Prudential Financial created
Prudential of Japan as a start-up about 24 years ago and has
focused on the affluent market through a steadily expanding sales
force that has focused on financial planning. It has profited
mightily from its Japanese operations, relying upon some of the
world’s thriftiest people to drive revenues that helped enormously
during the recent downturn in US insurance even as Japan itself
struggles to shake a decade of sluggish growth.
In 2001, Prudential’s Japan
strategy took a major step forward after it acquired Kyoei Life
Insurance, a bankrupt mutual insurer, renamed it Gibraltar Life
Insurance, and began selling to the mass market through captive
agents, called life advisers, and through banks. Gibraltar has
expanded in recent years to focus on retirement-oriented products,
including life insurance.
The addition of Star Life and
Edison Life greatly expands Prudential’s captive agent force in
Japan and widens its access to the bank channel, essentially
doubling the number of banks in its stable. At the end of 2010,
Star Life and Edison Life had some $174bn face amount of individual
insurance in force.
Edward Shields, an analyst at
investment bank Sandler O’Neill, lauded the deal as a
“transformative event” for Prudential. Of particular note, said
Shields, is that international business will play a more
significant role in the insurer’s pretax operating earnings and
will move it towards higher margin Japanese business from
lower-margin US business. The acquisition also adds “significant”
new distribution capacity, Shields said.
Shields also pointed out that
Prudential’s return on equity (ROE) is already higher than its
peers and has additional potential to increase.
“The acquisition of
Star/Edison will help fuel the ROE expansion for Prudential as the
Japan business has higher returns than the US life insurance and
annuity business,” Shields said in an investment review.
Dollar-denominated
policies
Prudential’s newly acquired
Japanese insurers have been selling what are called
“dollar-denominated” life insurance policies, an offshoot of whole
life products that builds cash value over time. The products pay a
death benefit but have substantial savings components and offer
few, if any, guarantees.
While Prudential’s business
in the US is fuelled by annuities, in Japan, the macroeconomic
situation clouds the picture for such products.
To sell variable annuities in
Japan, managers invest assets in both bonds and equities, and face
historically low interest rates that make it difficult to earn a
return large enough to pay the sales fees and other expenses,
return the principal to consumers, and still earn a profit. In the
current interest rate environment, it is hard to find a variable
annuity product in Japan, thanks to that formula.
In a February conference call
with reporters and analysts to discuss fourth-quarter 2010
earnings, Prudential executives said that Japan would continue to
generate the vast majority of its international growth. In 2010,
about 85% of Prudential’s new international business premiums came
from Japan.
“Japan is a market that
continues to present attractive opportunities for Prudential to
build on our success in protection products and increasingly to
address retirement needs,” Prudential CEO John Strangfeld Jr said
on the call. “We’re still relatively new to the bank general
business compared to a number of our competitors.”
Star and Edison hold
distribution relationships with more than 70 banks, Strangfeld
said.
Showdown with MetLife
looms
Prudential’s deal sets the
stage for a competitive showdown with another US insurer, MetLife,
which last year completed its acquisition of AIG’s American Life
Insurance Company (Alico) unit’s international subsidiary for
$16.2bn, and with US-based Aflac, which remains the largest foreign
life insurance company based on insurance premiums. Alico greatly
expanded MetLife’s geographic footprint, especially in
Japan.
MetLife’s Japan operation is
among the largest foreign life insurers in Japan and ranks sixth in
the Japanese life insurance industry measured by total premiums,
according to the Statistics of Life Insurance in Japan 2009. It
provides life insurance, accident and health insurance, annuities
and endowment products to both individuals and groups.
