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From Resource,
April 2005
Copyright by LOMA
Winning
Moves for Insurers
To compete successfully in a challenging business climate, life insurers are
spinning off operations, embracing mutual ownership and entering emerging
markets.
By
Jennifer C. Rankin
Everyone
loves a winner. In business circles, just the names Warren, Jack and Bill garner
instant recognition and a frisson of envy. What’s their secret? What’s their
formula for success?
During their heyday—the
‘90s—winning seemed to boil down to big is good, stock options are better,
and open markets are best. Many companies followed these mantras, including life
insurers, and many still do. Hence the popularity of acquisitions,
demutualization and any foreign market that hints it is interested in an open
market.
These
strategies, of course, have their merits. Mega-mergers and initial public
offerings (IPOs) in the North American life industry as well as joint venture
and
greenfield
operations in foreign markets have brought much success to the life companies
involved. Recently, however, there’s been a bit of resistance to them. Not a
backlash, but a taking stock, a little pruning, a more individualized approach.
Let’s
start with the frenzy of merger and acquisition activity during the past decade.
Many banks, securities firms and insurance companies bulked up during the
‘90s, either acquiring same-business rivals or, in a bid to become so-called
financial supermarkets, acquired diverse businesses.
A
bid for scale drove most same-business mergers and acquisitions. Market
saturation—both real and perceived—meant too many companies were competing
for a finite block of business. In addition, deep-pocketed European
multinationals went on a buying spree in
North America
. In the U.S., for example, the number of foreign-owned life insurers rose to
113—7.8 percent of the total number of life insurers operating in the
country—in 1998, according to the American Council of Life Insurers (ACLI).
That number peaked in 2001 at 142 foreign-owned life insurers (11.6 percent),
then dropped to 120 (10.7 percent) in 2003. Most of the foreign multinationals
now active in
America
are the world’s original financial supermarkets, with not only substantial
insurance operations, but also banking and brokerage interests.
Super
Sized
To meet
these new home-turf challenges, domestic insurers, banks and brokers began to
acquire or merge with other companies. In fact, consolidation has been a major
financial services industry trend for about a dozen years. According to the most
recent Life Insurers Fact Book, a compilation of statistics on and trends
in the
U.S.
life insurance industry published annually by the ACLI, 1,123 life insurance
companies were in business in the country at the end of 2003. The number of
active companies has fallen steadily since peaking in 1988, mostly due to
company mergers and acquisitions.
Last
year, for instance,
Canada
’s Manulife Financial acquired
U.S.
insurer John Hancock in a transaction that gave Manulife a market
capitalization of about US$ 24 billion, making it comparable in size to MetLife
and larger than Prudential Financial. The deal also transformed Manulife into
the largest life insurer in
Canada
, the second-largest in
North America
, and the fifth-largest in the world. Now that’s scale.
In
mid-2004, AXA Financial acquired The MONY Group. With US$ 458 billion in assets
under management, AXA Financial is the U.S. arm of French powerhouse AXA Group,
which purchased The Equitable in the ‘90s and renamed it AXA Financial. Like
Manulife, AXA is betting that scale will enable it to succeed in an increasingly
competitive market place.
Other
recent examples include Sun Life’s acquisition of Clarica in 2002 and AIG’s
acquisition of American General in 2001. These transactions moved Sun Life and
AIG closer to their strategic objectives of achieving leadership positions in
key target markets in North America, giving them both the scale and shelf space
necessary to succeed in a highly competitive market place.
Convergence—that
is, the concept of the financial services supermarket that offers insurance,
bank and securities products to consumers—also sparked interest in mergers and
acquisitions in
North America
.
Citigroup—the
1997 progeny of the now legendary merger between banking and insurance giants
Citibank and Travelers—was
America
’s first financial supermarket. In fact, many analysts believe its aggressive
pursuit of said merger was the primary driver behind the passage of the Gramm-Leach-Bliley
Act, which dissolved historical walls separating the banking, insurance
and brokerage industries, the following year. The merger was supposed to pave
the way for a brave, new financial services era. An era in which banks
underwrote insurance, insurers opened banks, everyone was a broker, and every
sale became a potential cross-sale.
Although
pundits are questioning its validity today—we’ll get to the whys later—the
financial supermarket model is a sound one. After all, it has worked for the
Europeans for decades. And as they continued to make significant inroads into
the
United States
, it made sense to fight fire with fire, so to speak. In addition, an
increasingly knowledgeable and decreasingly risk-averse financial services
consumer seemed ready for one-stop product shopping.
The
idea, however, has yet to take off in a really big way. Since then, the only
sizeable bank-insurer merger was Bank One’s 2003 acquisition of Zurich Life.
There are a number of success stories. Several insurers have launched banks that
are turning solid profits. Although they’re not rushing to become
underwriters, banks are buying insurance agencies in the hopes of turning a
profit as distributors. Banks and insurers also continue to forge lucrative
alliances to sell each other’s products. And many insurers are successful mutual fund players.
Spinning
Off
While
interest in consolidation and convergence certainly has not abated, an
interesting new trend—divestiture—has emerged recently.
In
late 2000,
U.S.
life and health insurer
Aetna
spun off its life operations, selling its financial services unit and
international businesses to Dutch financial services conglomerate ING Groep NV
in order to concentrate on its domestic health insurance, group insurance and
large case pension operations. With US$ 72.2 billion in assets under management
as of March 31, 2000,
Aetna
’s financial services businesses
sell retirement and investment products to nonprofit organizations, government entities,
small businesses and individuals. Its international
businesses primarily sell life insurance and health and retirement
services products in emerging markets. In July 2000, Aetna sold its 49 percent
stake in Venezuela-based joint venture Mercantil Servicios Finan-cieros to
Seguros Mercantil and sold its
New Zealand
health insurer.
Acquiring
Aetna’s financial services division further solidified ING’s presence in the
U.S.
insurance market. Earlier that year, ING acquired ReliaStar Financial. These
transactions catapulted ING into the No. 1 spot for life and annuity premiums in
the
U.S.
and the No. 6 spot for statutory assets.
Safeco
was next, existing several lines of business last year. In April 2004, the
insurer sold Safeco Trust Company and in July 2004 sold its Talbot Financial
Corporation insurance brokerage operation. In August 2004, the company sold
Safeco Life & Investment, which had been a part of Safeco Corp. for 47
years, to a group of investors led by White Mountains Insurance Group and
Berkshire Hathaway, which renamed the operation Symetra Financial the following
month. With the sale, Safeco fully divested its life insurance, group insurance,
annuities and mutual fund businesses.
Why?
The company intends to build on its success as a leading property and casualty
player. “With the sales completed,” said Mike McGavick, chairman and CEO,
Safeco, in a statement to the media, “our energy and focus are fully directed
on our property and casualty business. Our profitability, sales momentum and
strong partnerships with independent agents demonstrate clearly that we’re on
the right course for future success.”
Then
GE spun off its life and mortgage insurance operations in an initial public
offering (IPO) of a new company it named Genworth Financial. Although GE sold
only 30 percent of the new company in the IPO, it intends to reduce its 70
percent ownership position over the next few years to enable Genworth to become
a fully independent company.
What
compelled GE to exit the life insurance sector? For years, the conglomerate had
ranked among the top life players. In 2003, GE Financial Assurance Group (GEFA)
ranked 3rd among
life insurers as measured by individual life insurance in force; 9th as measured by
individual life insurance issued; 16th as
measured by total assets; and 19th as
measured by total net life insurance premiums. This is not too shabby for a
relative newcomer.
Like
Citigroup, GE is a conglomerate with many business interests. It’s a
diversified technology and services company involved in everything from aircraft
engines and power generation to financial services, medical imaging, television
programming and plastics. GE operates in more than 100 countries and employees
more than 300,000 people worldwide.
When
announcing the spin-off, new Chairman and CEO Jeff Immelt said his primary goal
for GE was faster growth. To reach that goal, he decided to exit the life
business and plow that capital into its faster-growing commercial- and
consumer-finance businesses. This came as no surprise to GE watchers. After
taking a US$ 1.4 billion charge in 2002, Immelt had made it clear that he
intended to reduce GE’s exposure to the insurance businesses. In fact, GE has
told investors it intends to reduce its insurance business from 40 to 15 percent
of its overall financial services assets, which total some US$ 500 billion.
Last
month, GE announced it plans to lower its stake in Genworth to 51 percent over
the next two years, ushering the spin-off toward full independence. “These
actions are consistent with our strategy to continue to reduce our investment in
insurance,” said Immelt, “and will accelerate GE cash-flow growth.”
If
the GE announcement came as no surprise, Citigroup’s did. Although the
behemoth began to exit the insurance industry in 2002, when it spun off
Travelers’s property/casualty lines, which then merged with the St. Paul
Companies, few industry watchers expected what happened next. Two months ago,
just a few years after it made history as America’s first true financial
supermarket, Citigroup spun off virtually all of its international insurance
businesses as well as Travelers Life & Annuity, selling them to MetLife.
Travelers Life & Annuity is a leading underwriter in the
U.S.
for variable annuities, structured settlements, universal life and variable
universal life products and has attractive international franchises.
The
day after Citigroup agreed to sell its Travelers life and annuity business to
MetLife, American Express unveiled plans to spin off American Express Financial
Advisors (AEFA) to shareholders. The transaction is expected to close in the
third quarter of 2005.
This
is big news. AEFA is a leading player in financial planning and advice services,
asset management, insurance, annuities and related businesses. It generated
revenues of about US$ 7 billion and net income of about US$ 700 million in 2004;
manages more than US$ 410 billion in assets; and has more than US$ 145 billion
of insurance in force. AEFA has a nationwide network of some 12,000 advisors who
serve more than 2.5 million clients as well as strong ties to more than two
dozen banks—including FleetBoston, Wachovia and Wells Fargo—that sell its
annuity products. AEFA also has a solid international presence with the recent
acquisition of U.K.-based Threadneedle Asset Management. Last year, American
Express was the nation’s 11th-largest
provider of variable annuities and the 20th-largest life insurer.
American
Express says it wants to focus on its highly profitable charge and credit card
business and a charge-processing network that handles more than US$ 400 billion
in transactions every year. Following the spin-off, American Express plans to
raise its return on equity target from 18-20 percent to 28-30 percent and
maintain its current dividend.
Profit Motive
What is driving these divestments? In an interview with Reuters reporter
Joseph Giannone, executives at both Citigroup and American Express said the
moves will let them increase their stakes in more lucrative pursuits. The
operative word here is lucrative. In today’s go-go market, where investors and
Wall Street want high returns and they want them fast, insurance, with its
long-term horizon, doesn’t always deliver. According to Giannone, investors
are raising the bar on financial performance, forcing companies to invest only
in the most profitable activities.
In
a recent Market-Watch e-briefing, reporter Alistair Barr discussed a Deutsch
Bank analysis of the Citigroup and other financial services spin-offs. According
to bank analysts, the Citigroup business Met-Life is buying made US$ 901 million
in profit in 2004 on revenue of US$ 5.2 billion. That was a small part of the
US$ 17 billion in profit and US$ 86 billion in revenue that the banking giant
generated that year.
After
dropping to an eight-year low of nearly 12 times earnings in 2002, the valuation
ratio of life insurers has risen steadily to 13.7 times profit in 2004,
according to the Deutsch Bank report. While life insurance stocks have risen,
earnings in the industry may not continue to climb. Profits in 2004 were
bolstered by one-time gains such as prepayment income and tax gains. Those
benefits will probably be missing in 2005 results, according to Deutsch Bank,
which sees owners of private life insurance operations opting to cash out at
current valuations, rather than wait for earnings growth and returns to revert
to the mean.
Another
recent trend in the life insurance industry is demutualization. Most
U.S.
life insurers are organized as either stock or mutual companies. Stock life
insurance companies issue stock and are owned by their stockholders. Mutual
companies are legally owned by their policyholders and thus do not
issue stock.
Stock
life insurers can be owned by other stock life insurance companies, mutual life
insurance companies, or companies outside the life insurance industry. Only
policyholders own a mutual company.
Of
the 1,123 life insurers active in the
U.S.
, 1,019 are stock companies (91 percent) and 92 are mutual companies, according
to the ACLI. Stock companies hold US$ 14.9 trillion of the US$ 17.8 trillion of
life insurance in force, while mutual companies hold US$ 1.9 trillion and
fraternal societies and the U.S. Department of Veterans Affairs hold the
remainder.
During
the past decade, many of America’s leading mutual insurers have either
demutualized—that is, converted from a policyholder-owned company to a
publicly traded stock company—or formed a mutual holding company (MHC). To
create an MHC, the mutual insurer either starts a stock insurance company or
acquires one. Former mutual companies give several reasons for implementing
these strategies, with fast access to relatively cheap capital topping the list.
Why
is capital important? For starters, capital gives you more control over your
destiny. It allows a company to make acquisitions, to thwart a takeover, or
both. This can be a vital edge in a market that’s consolidating due to market
saturation and foreign acquisitions as well as converging as the walls
separating insurers, banks, and securities dissolve.
Capital
also allows a company to attract and retain talent. Public ownership allows an
insurer to offer stock options to its employees, boosting their total
compensation and enabling them to participate more fully in the company’s
success if the stock takes off.
Proponents
also say the stock form of ownership forces a company to be more efficient. In
other words, the market place forces publicly-traded companies to enact tighter
expense and budget controls and stricter oversight to bolster the price per
share.
These
are compelling arguments and the list of North American insurers that have
demutualized or formed MHCs recently reads like a Who’s Who of the
industry.
Northwestern
National (now ReliaStar) was the first, demutualizing in 1989. Equitable Life
was next, demu-tualizing in 1992. Its annuity sales took off and its stock
performed well. Mutual company executives took note and began to consider taking
their own companies public. In 1998, Mutual of New York converted to public
ownership, followed by ManuLife (1999), Canada Life (1999), Mutual Life of
Canada (now Clarica) (1999), Industrial-Alliance (2000), John Hancock (2000),
Metropolitan Life (2000), Sun Life (2000), Prudential (2001), Principal Mutual
(2001). This is just a sampling of the many demutualizations, MHC formations,
and IPOs that have taken place during the past few years.
Today,
mutual companies represent only 16 percent of the North American industry’s
assets, compared with 26 percent in 2000, 44 percent in 1990, and 55 percent in
1985, according to A.M. Best.
It’s
important to note that demutualizations are not just a
U.S.
phenomenon. Virtually all of
Canada
’s mutual life insurers have demutualized. Last year, Mitsui Mutual Life
became the third Japanese insurer to demutualize, following Daido Life, which
demutualized in April 2002, and Taiyo Life, which demutualized in April 2003. In
addition, Standard Life (U.K.),
Europe
’s largest mutual, demutualized last year.
Different Drummer
A handful of mutual insurance company executives, however, are
sidestepping the stampede to go public, saying there are just as many compelling
reasons to retain the mutual form of ownership. Who are these companies and why
are they committed to mutuality?
For
starters, the mutual form of ownership has deep roots around the world—a
tradition today’s mutual companies are proud to uphold. Originating in England
in 1696 with the establishment of the first mutual fire insurer, the mutual
concept migrated to America with the successful founding of the Philadelphia
Contributionship for the Insurance of Houses From Loss by Fire, in 1752, by
Benjamin Franklin, according to the National Association of Mutual Insurance
Companies (NAMIC). For 150 years, some of the largest and most successful life
insurance companies in the U.S. and Canada were mutual companies—among them,
Metropolitan, Prudential, New York Life, Equitable, Northwestern Mutual,
MassMutual, Guardian Life, Mutual of New York, John Hancock, Manulife and Sun
Life.
Despite
the fact that most of these companies have demutualized, many have not and are
leveraging their mutual status for competitive advantage.
The
top three mutual insurers in
North America
are New York Life, Northwestern Mutual and MassMutual. All
three are among the largest insurance companies in the
United States
and listed on the Fortune 500. New York Life is the largest mutual life
insurance company by revenue (US$ 25.7 billion as of 12/31/03), according to
Fortune. It is also the largest mutual life insurer by assets (US$ 147 billion
as of 9/30/04) and capital and surplus (US$ 9.5 billion as of 9/30/04),
according to A.M. Best Co. In reporting its 2004 financial performance on March
22, New York Life said it has over US$ 616 billion in life insurance in force
worldwide.
There
are many advantages to the mutual form of ownership, among them:
Capital strength. Many mutual insurers don’t need to raise cash by
issuing shares of stock, because they already have sufficient capital to fuel
future growth. Plus, the verdict is still out on going public—in fact, many
analysts say insurance company IPOs have yielded lackluster stock share prices.
Finally, it has yet to be proven that a stock company can outperform a mutual
company.
Strategic clarity. Stock insurers must meet the needs of two kinds of
customers—policyholders, who want cost-effective and enriched insurance
products, and shareholders, who want profits. Mutual insurers serve only the
needs of their policyholders.
Independence
. Mutual ownership allows a company to preserve its independence.
Shareholder value is the primary measure of a public company’s success. If a
suitor offers a significantly better price, chances are the company will be
acquired.
Customer satisfaction. With no stockholders to pay profits to, mutual
insurers often use excess earnings to lower premiums, enhance products, or issue
special dividends in the form of capital distributions.
Market differentiation. As more and more companies demutualize,
mutuality confers a level of uniqueness, which becomes a marketing advantage.
Philosophical match. Mutuality is consistent with the long-term
nature of insurance products, frees a company from the pressure to deliver
short-term profits, and allows a company to invest in its future.
Mutuality,
then, makes business sense to many executives, who are touting these benefits.
New York Life, for example, conducted a print advertising campaign in 2004 that
communicated its commitment to mutual ownership. One of the three ads reads: You
won’t see New York Life listed on a stock exchange because we’re a mutual
company. Being mutual means we’re owned by our policyholders, not
stockholders. Rather than focusing on quarterly results, we care about the long
term. After you buy a New York Life policy, you may not need us for years, or
even decades. But when you do, we’ll be there.
In
fact, New York Life Chairman and CEO Sy Sternberg has gone on record many times
about the advantages of mutuality, saying the company’s main reason for
remaining a mutual rests in its belief in the unique nature of the life
insurance business. “We sell a promise,” he says, “to stay strong and
secure to help our customers pay for college, fund a retirement or pay bills if
tragedy strikes—today or many years in the future. Our long-term outlook and
single focus on policyholders resonates with consumers now more than ever.”
Will
the contrarian strategy of New York Life, Northwestern Mutual, MassMutual and
others prove to be the right one? The public will ultimately decide where they
feel their money is most secure. Today, millions choose mutual insurers and
that’s not likely to change any time soon given their outstanding reputations
and financial strength.
New Horizons
In
addition to retooling—or, in many cases, reiterating—their strategic intent,
North American life insurers continue to reach far beyond their own back yards
for market share.
North
American insurers are pursuing global expansion at a pace rivaling that of
European insurers’ entry into
U.S.
markets in the early 1990s, according to TowerGroup. Improving economies,
favorable demographic trends and the gradual dissolution of international
barriers to entry have converged to create high growth potential in emerging
markets, especially in the Asia Pacific
region.
In
fact, Swiss Re says emerging markets will be the new frontier for insurance
throughout the 21st century.
According to the latest study from its sigma series, the life premiums
collected from these markets will increase from US$ 188 billion to US$ 450
billion by the year 2014. Swiss Re expects the top emerging life insurance
markets, in rank order, to be
South Korea
,
China
,
Taiwan
,
South Africa
,
India
,
Hong Kong
,
Brazil
,
Singapore
,
Russia
and
Mexico
. Six of these 10 markets are Asian.
During
the past year,
U.S.
and Canadian insurers continued to make inroads into foreign markets. Many are
strengthening their positions in Asia, which analysts believe is poised to see
growth levels unseen since the 1997-1998 Asian Crisis, especially in
China
and
India
. Even
Japan
is experiencing a vigorous cyclical upswing that may enable it to break free
from its recent deflationary spiral. And a new word has entered the
international business lexicon: BRIC, an acronym for the developing economies of
Brazil
,
Russia
,
India
and
China
, countries in which many of the world’s leading multinationals have much
interest.
Let’s
take a look at recent activities in some of these markets.
China
, of course, is
uppermost on everyone’s minds and virtually all of the multinational financial
services players now have a presence in the country, including the North America-based insurers AIG, Manulife,
MetLife
,
New York
Life, Principal Financial, and Sun Life.
During
the past 10 months, the China Insurance Regulatory Commission (CIRC) made great
progress on its liberalization program. In May 2004, it announced new rules for
the opening of extra branches in
China
. The new rules reduce paid-in capital and double the stake that local and
foreign investors may purchase in Chinese insurers to 20 percent. In July 2004,
the CIRC issued a provisional regulation that allows the formation of insurance
asset management companies. In December 2004, it removed geographical and
product restrictions on the 30+ existing foreign insurance companies and their
joint venture partners. Under the new rules, foreigners will be able to sell
group insurance, which previously was not allowed, and to apply to operate in
any city in the country. The CIRC also gave final approval for local and joint
venture insurance companies to invest assets directly into Chinese shares and
bonds, a ruling that will spur insurers to accelerate the creation of their own
fund management subsidiaries, not only to manage premium income, but also to
prepare themselves to compete for mandates to run pension monies in the future,
according to Financial Times analysts.
The
result? Even more activity than usual in one of the world’s most attractive
markets, especially among
U.S.
and Canadian multinationals:
June 2004—Sino-U.S. MetLife, a life insurance joint venture between
MetLife and Capital Airports Holding Company, opens for business.
June 2004—Sun Life Everbright, a life insurance joint venture
established by Sun Life and China Everbright Group in
Tianjin
in 2002, opens its first branch in
Beijing
.
August 2004—AIG wins initial approval to establish an asset management
company. AIG Global Investment Corp. and
China
’s Huatai Securities will have a one-third stake each in the US$ 12 million
company, which will be called AIG-Huatai Fund Management Co. and will be based
in
Shanghai
. When approved, AIG will join other foreign players, including ING and Societe
Generale, that have forged JVs to sell mutual funds to the Chinese.
November
2004—Haier New York Life, a joint venture between New York Life and China’s
Haier Group, receives approval to establish a branch in Chengdu, the company’s
first expansion since it launched operations in Shanghai in late 2002.
November
2004—Manulife-Sinochem Life, a joint venture between Manulife Financial and
China Foreign Economic and Trade Trust & Investment Company, a member of the
Sinochem Group, receives approval to establish a branch in Ningbo. This is
Manulife-Sinochem’s third branch license. As the first foreign-invested joint
venture life insurance company in
China
, Manulife-Sinochem was launched in
Shanghai
in 1996. It opened its first branch office in
Guangzhou
in November 2002 and a second in
Beijing
in April 2004.
January 2005—Sun Life Everbright
signs a comprehensive cooperation agreement with the Agricultural Bank of
China
to accelerate its business development in the promising Chinese market. Under
the terms of the agreement, the two companies will cooperate in a full range of
areas, including bancassurance, deposit agreements, financing, clearing, bank
cards and e-commerce. They also agreed to deepen their bancassurance cooperation
by opening new distribution channels such as financial consulting,
telemarketing, and online banking.
January 2005—CIGNA and CMC Life
Insurance Co. Ltd., a joint venture between CIGNA International and Shenzhen
Dingzun Investment Advisory Co. Ltd. (SDZ), announces it will establish branches
in
Beijing
,
Shanghai
and
Guangzhou
in 2005. The partners set up their joint venture in Shenzhen in 2003.
March 2005—Manulife-Sinochem receives
approval to convert its Guangzhou branch license into a province-wide license
for Guangdong, excluding Shenzhen, as well as permission to expand its China
operating license to include group life and health and non-tax benefit pension
business.
The
South Korean financial services sector also continues to attract much attention.
In 1998, foreign life insurers held one percent of market share. That share grew
to eight percent in FY2001, to 10.5 percent in FY2002, and to 30 percent in
FY2003, according to the Financial Supervisory Committee (FSC). Among the North
American life insurers active in
South Korea
are AIG,
MetLife
,
New York
Life, and Prudential Financial.
The
insurance industry has evolved rapidly since
South Korea
joined the OECD in 1996.
South Korea
has begun to deregulate and open its financial services sector to outside
competition. It also is chipping away the barriers separating the banking,
securities and insurance industries. Bancassurance made its debut in late 2003,
when
South Korea
gave banks permission to sell insurance policies on a limited basis and pledged
to open the market fully to non-insurers by 2007. In late 2004, insurers lobbied
the FSC to delay the April 2005 deadline for allowing banks to sell auto
insurance. Two months ago, the FSC did just that, saying it wanted to give
insurers time to gear up for an expected burst of competition from banks and
other non-insurers.
Last
month, MetLife acquired SK Life, which holds 2.6 percent of the country’s life
insurance premiums, winning a bidding contest among HSBC, Manulife and other
leading multinationals. In February,
U.S.
fund manager Fidelity acquired a license to run an asset management business in
South Korea
, becoming the 10th foreign
firm chasing a US$ 140 billion market, according to Reuters. A year earlier,
Prudential Financial bought two government-owned asset managers, becoming the
largest foreign player in the market. At present, according to the FSC,
foreign-owned asset managers control about 18 percent of the market.
Despite
its economic challenges,
Japan
continues to attract foreign interest. Among the North American life insurers
active in
Japan
are AIG, MassMutual, Principal Financial and Prudential Financial.
A
vital current issue is the planned privatization of Japan Post, which is the
world’s largest savings institution as measured by assets. Since World War II,
Japanese citizens have placed their money in Japanese Post savings accounts and
purchased kampo (easy) insurance. Privately-owned life insurers—both
domestic and foreign—are lobbying against the government proposal, especially
its intent to allow Japan Post to set up a private insurance arm, which might
allow Japan Post to sell a wider variety of insurance products backed by
government guarantees as well as extend its current tax exemptions, which are
not available to private life insurers.
Another
important issue is the timetable for deregulation that would allow banks and
other non-insurance companies to sell a broader range of insurance products.
Originally scheduled for this Spring, the schedule has been pushed back to
October, at the earliest, according to Nikkei News. The scope of the measure
will also be more limited than planned, given that restrictions on such products
as medical and cancer insurance will remain in place. The ban on marketing some
non-life insurance products was partially lifted in April 2001, and the sale of
individual annuities was deregulated in October 2002.
Annuities
continue to be a booming market in
Japan
. Hartford Financial, for example, launched a line of variable annuities in
December 2000 through its Japanese subsidiary Hartford Life Insurance K.K. By
year-end 2004, it had amassed close to US$ 15 billion in variable annuity assets
under management, becoming the No. 1 seller of variable annuities in the
country. In November 2004, The Hartford introduced two fixed annuities. The
insurer offers annuities through some 50 Japanese distributors, including
broker-dealer firms and banks.
MassMutual,
which has teamed up with Nikko Cordial Corp. to market a new fixed annuity
product in
Japan
, has expressed interest in starting an asset management business in the
country. MassMutual has been operating in
Japan
for three years.
Prudential
Life has just acquired Aoba Life from Tawa SA, a French investment company and
subsidiary of the Artemis Group. Aoba Life will operate as a subsidiary of
Prudential.
In
January, AIG announced that subsidiaries American Home Assurance and AIU
Insurance will purchase the Japanese insurance portfolio of Royal &
SunAlliance. The following month, AIG announced that AIG Star had entered into a
business alliance with Bank of Tokyo-Mitsubishi to develop and promote
individual annuity products. On February 1,
they launch-ed a new multi-currency fixed annuity product; before the
launch, fixed annuity products in
Japan
were either yen-denominated or foreign currency denominated.
Last
month, Mitsui Sumitomo said it hoped to begin talks with MetLife about teaming
up in the individual annuity sector. The Japanese insurer currently has a joint
venture operation with Citigroup, which, as discussed earlier, has sold its life
insurance and annuity operations to MetLife.
Another
Asian market that’s heating up is
India
. Last year, the Indian government increased the 26 percent cap on foreign
holding for Indian insurance joint ventures to 49 percent. In addition,
India
’s booming economy is producing an upswing in the number of mass affluent
citizens. According to a report just published by Datamonitor, affluent wealth
in
India
has grown at a rate of almost 18 percent during the past five years, with
affluent individuals totaling 618,000 at the end of 2003. This trend is
attracting foreign insurers and wealth managers to
India
, including AIG,
MetLife
,
New York
Life, Principal Financial and Sun Life.
The
most recent news from
India
involves a Principal Financial partnership. Last month, the Financial Express
reported that Principal Financial Group will launch the country’s first
agent-less life insurance company during the next six months in a four-way
partnership with Punjab National Bank, Vijaya Bank and the Berger Group. The
company plans to sell only group and corporate life insurance policies. At
present, Principal Financial’s Indian operations consist of Principal Asset
Management, which sells long-term investment plans and mutual funds and
distributes its products through Punjab National Bank and Vijaya Bank, as well
as via other financial services distributors, major private banks and the Indian
Post Office. Principal Financial first entered
India
in September 2000 through a joint venture with the Industrial Development Bank
in India (IDBI). In 2003, Principal Financial purchased IDBI’s 50 percent
stake in IDBI-PRINCIPAL Asset Management Company Limited and entered into a
joint venture with Punjab National Bank and Vijaya Bank.
Taiwan
’s life
insurance and asset management markets are poised for strong growth during the
coming years now that the country’s parliament has approved a sweeping package
of pension reforms. Passed in June 2004, the new system requires companies to
pay six percent of every employee’s monthly salary into a pension fund.
Employees are guaranteed retirement benefits regardless of whether they change
employer or profession. This is good news for both domestic and foreign insurers
operating in the country, among them AIG, Manulife, MassMutual,
MetLife
,
New York
Life, and Prudential Financial.
In
January, MassMutual agreed to buy the global investment management activities of
Baring Asset Management from ING Groep NV. The acquisition significantly expands
MassMutual’s asset management presence around the world, especially in
Asia
, and is the company’s third internationally-focused addition in the past
year.
What
does the future hold for North American insurers that want to increase their
international presence? For the moment, Asia holds the most promise and
Vietnam
is poised to take off next. Under the Vietnam-U.S. bilateral trade agreement,
U.S.
insurers will be licensed to operate as 100 percent foreign-owned companies in
the country next year.
Canada
’s Manulife is already there. In fact, Manulife (
Vietnam
) Ltd was the first wholly foreign-owned insurance company in the country. And
last month, Manulife filed an application with
Vietnam
’s State Securities Commission to set up a fund management company in
Ho Chi Minh City
. If the petition is approved, Manulife will become the second life insurer to
set up a fund management company in
Vietnam
, after Prudential
U.K.
As you can see, there are lots of ways to win. Among the strategies
successful life insurers have implemented are divesting operations, leveraging
mutuality and going global. What’s your move?
Exit
Here--Divestiture
While
no one expects M&A activity in the North American life insurance sector to
abate any time soon, an interesting new trend—divestiture—has emerged.
Recent divestments of life operations include:
Aetna
’s spin-off of its domestic and international life operations, which Dutch
financial services conglomerate ING Groep NV bought.
Safeco’s
divestment of its life insurance insurance, group insurance, annuities and
mutual fund businesses, which a group of investors led by White Mountains
Insurance Group and Berkshire Hathaway subsequently purchased and renamed
Symetra Financial.
GE’s
spin-off of its life and mortgage insurance operations in an initial public
offering (IPO) of a new company it named Genworth Financial.
Citigroup’s
spin-off of virtually all of its international life insurance businesses as well
as Travelers Life & Annuity, which MetLife bought.
American
Express’s spin-off of American Express Financial Advisors (AEFA) to
shareholders.
Among the reasons executives give for these divestments are investor
demands for financial performance, a desire to invest in more profitable
activities, and the ability to focus on their core business strategies.
Going
Global
North
American insurers continue to reach far beyond their own backyards for market
share. Here’s a sampling of who’s going where.
AIG
AIG has
a presence in every major market in the world. From its 1919 start in
Shanghai
, AIG has grown into a powerhouse organized around four major business segments:
general insurance, life insurance, financial services, and retirement
services/asset management. AIG has 86,000 employees and 628,000 sales
representatives in more than 130 countries and jurisdictions.
Manulife
Financial
Manulife opened its first office in
Asia
just 10 years after incorporation in 1887. Increasingly, Manulife derives its
growth and operating income from
Asia
. Some 22,000 full-time agents sell individual and employee life and health
insurance, provident funds, and savings and investment products. Manulife is a
major player in
Hong Kong
,
China
,
Taiwan
,
Indonesia
, the
Philippines
,
Vietnam
,
Malaysia
, and
Thailand
. The company gained entry into
Thailand
a year ago, following its acquisition of U.S.-based John Hancock.
MassMutual
Financial
MassMutual
International, the company’s global business subsidiary, has operations in
Asia, South America and
Europe
. With nearly 17,000 employees and sales representatives, MassMutual
International has life, health and accident insurance as well as annuity
operations in
Hong Kong
,
Japan
,
Taiwan
,
Chile
,
Luxembourg
,
Bermuda
,
Macao
and a representative office in
Shanghai
.
MetLife
MetLife continues to make significant inroads into foreign markets. At
present, it is active in the life insurance, annuities, retirement savings, and
pension fund management markets in Latin America, with three companies in
Argentina
; two companies in
Brazil
; two companies in
Chile
; a company in
Mexico
; and a company in
Uruguay
. MetLife also has a growing presence in
Asia
, where it offers life insurance, savings, health, investment, employee benefit
plan, annuity, endowment and other products. It has a joint venture company and
representative offices in
China
; a company in Hong Kong; a joint venture company in
India
; a majority-owned affiliate in
Indonesia
; an affiliate in
South Korea
; and a subsidiary in
Taiwan
.
New York
Life
Another
successful international player, New York Life has operations in Latin America
and
Asia
. It has two joint venture operations—a life insurance company and a pensions
business—in Argentina with partner HSBC and bought leading Mexican insurer
Seguros Monterrey in 2000, merging it with its existing life insurance operation
there to form Seguros Monterrey New York Life. New York Life is very active in
Asia, with companies in
China
,
Hong Kong
,
India
, the
Philippines
,
South Korea
,
Taiwan
, and
Thailand
. In December 2000, it opened a representative office in
Vietnam
, where it hopes to receive a license to sell life insurance.
Principal
Financial
Committed
to serving the financial needs of customers around the world, Principal
Financial has life, pension, annuity, asset management and investment operations
in Latin America (
Brazil
,
Chile
, and
Mexico
) and Asia (
India
,
Japan
,
Malaysia
, and
Singapore
). The company also has representative offices in
Beijing
.
Prudential
Financial
One of
the largest financial services institutions in the world, Prudential Financial
has insurance operations in
Argentina
,
Brazil
,
Japan
,
Korea
,
Taiwan
, the
Philippines
,
Poland
, and
Italy
.
Sun
Life of
Canada
Active
in Asia since 1892, Sun Life has a life insurance joint-venture company in
China
; a company in Hong Kong offering primarily individual life insurance;
joint-venture companies in
India
for life insurance, mutual fund management, and investment advisory and
financial product distribution; a life company in
Indonesia
; and life and asset management companies in the
Philippines
.
Sources:
Corporate annual reports and Web sites; business media.
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