AIG boosts its niche in Japan with GE deal. (Highlights from BestWeek).

American International Group Inc. will boost its already-formidable presence in Japan's life insurance market by acquiring the operations of General Electric's GE Insurance there.

AIG said it will buy GE Edison Life Insurance Co. in Japan, as well as GE's U.S.-based GE Auto & Home Assurance Co., for $2.15 billion. GE Insurance said the transaction is expected to close by the end of September, subject to regulatory approvals. The deal will give the two units growth opportunities as AIG subsidiaries, GE Insurance said. The move also conforms to GE Insurance's strategy to redirect capital to what GE Insurance considers more promising lines of business.

"As far as foreign insurers in the Japanese life insurance market go, this will put AIG either in the one or two positions" said Chad Hersh, an industry analyst with Celent Communications LLC, a financial services research and consulting firm. "This acquisition should provide them with a springboard to multiple lines in Japan."

Hersh compared the move to AIG's acquisition of American General Corp. in the United States in 2001, which in one stroke catapulted AIG to the top of the list of U.S. life insurers and opened up new market opportunities in related financial services products such as wealth management and retirement (BestWire, Aug, 30, 2001). Hersch said neither of AIG's two current life insurers in Japan--AIG Star Life and American Life Insurance Co., or Alico--is among the top three in the market. But taken together, and with the addition of GE Edison Life, AIG will be at or near the top. "I wouldn't be surprised to see AIG make further acquisitions in Japan," he said.

GE Insurance spokesman Mike Kachel said GE Edison Life has been a profitable business, with pretax earnings of between $230 million and $255 million in each of the past three years. But its relatively small share of the market suggested it would have little prospect for growth on its own. "GE Edison Life is about 15th or 16th in terms of market share in Japan," he said. "It has been doing well in a difficult market, but it isn't likely to become a top 10 player."

GE Edison Life has about 6,000 employees, 5,000 of whom are in sales, said Kachel. GE Auto & Home, based in Fort Washington, Pa., is a much smaller operation, with 750 employees and business in 13 U.S. states, he said.

Kachel said the sale of the two subsidiaries is part of a strategic shift by GE Insurance, which is focusing markets where it believes it has the greatest chance of maximizing returns. GE Insurance has identified three strategic areas--targeted consumer retirement income and protection markets, certain commercial and reinsurance segments and credit enhancement markets such as mortgage insurance.

Both Kachel and spokespeople for AIG declined to give numbers on premium volume or, in the case of GE Auto & Home, combined ratios. An AIG spokesman said the company doesn't make it a practice to break out premium numbers for individual units.

AIG Chairman and CEO Maurice R. Greenberg said GE Edison Life will complement AIG's current Japanese units--AIG Star Life and Alico Japan, enhancing AIG's distribution platform for life, annuity and accident and health insurance products. "This transaction represents a significant opportunity to expand AIG's presence in the Japanese life insurance market, the second-largest in the world," said Greenberg in a statement.

AIG, like other foreign-based insurers in Japan's life market, continues to expand its market presence as domestic Japanese life insurers struggle with evaporating investment returns in an economy that has been stagnant for a decade. Asahi Mutual Life Insurance Co. for instance, cited slumping insurance business and a sagging investment portfolio when it announced early this year that it would withdraw from an integration plan with another Japanese company--Millea Holdings Inc.--since current market conditions would force it to delay a planned conversion to a stock company (BestWire, Jan. 10, 2003). Asahi was to be part of a four-way combination of Japanese insurers including Tokio Marine & Fire Insurance Co. Ltd. and Nichido Fire & Marine Insurance Co. Ltd. The latter two are now subsidiaries of the Millea group.

"The Japanese insurance market is weaker," said Hersh. "Everyone's been hurt by declining Japanese stock market investments. Foreign insurers in Japan are probably less hurt because they have more of their investments in other markets."

As investors and consumers in Japan become less certain about the financial strength of domestic companies, a foreign player like AIG, with known financial strength and a fairly recognizable brand name in Japan, gains some marketing clout, Hersh added. "The economic environment does represent some opportunities for foreign insurers to expand in Japan," he said.

Hersh said AIG and other foreign insurers are benefiting from a flight to quality among consumers, who are increasingly concerned about the financial viability of the insurers they deal with.

AIG's Greenberg himself emphasized the flight-to-quality aspect of AIG's growing businesses in Japan and the rest of the Asia-Pacific region in a speech at the company's annual shareholders meeting (BestWire, May 14, 2003).