Life support.

The Japanese life market may be volatile but Axa is not regretting its decision to take over Nippon Dantai. Jeremy Golden reports.

Until recently it would have been impossible to imagine that a foreign company such as France's Axa Group - virtually unknown in Japan until a few years ago - would take over an ailing Japanese life company, drop the Japanese name and make its name a widely recognised and trusted brand in life insurance.

Axa has done just that, despite the common belief that the Japanese consumer or corporation would invariably choose the security of a home-grown brand when making the important decision of choosing a life insurer.

However, the prolonged recession and deregulation have completely changed the business climate in Japan, allowing foreign multinationals to penetrate the mainstream successfully - frequently through the acquisition of Japanese companies.

Based on figures from the Ministry of Finance, foreign direct investment in Japan in the form of capital participation, acquisitions and loans reached a record Y3.12trn ($26bn) in fiscal 2000/01.

Foreign players

Foreign activity in the life market has been precipitated by the collapse of several Japanese insurers as a result of the massive 'negative yield gap'; the shortfall between the dividends insurers promised to policyholders (up to 6.5% a year) at the height of Japan's speculative 'bubble' and the poor returns on its investments after the bubble burst.

Specifically, the fall in real-estate prices and the very low yields of Japanese government bonds (less than 2%) in which insurance companies had invested heavily rapidly drained them of capital. The shortfall for Japan's 10 largest life insurers was estimated at Y1.388trn last September.

Since 1997 six Japanese life companies, starting with Nissan Mutual Life, have gone under with liabilities totalling $220bn. Last October the bankruptcy of Kyoei Life, Japan's 11th largest life insurer by asset value, with total debts of Y4.5trn, was Japan's biggest-ever corporate failure. Prudential of the US has since taken over Kyoei Life, which has been trading as Gibraltar Life since April. Other foreign acquisitions include AIG's purchase of Chiyoda Life.

Axa alone chose to buy a company before it went bankrupt. It took over Nippon Dantai, also known as Nichidan, Japan's 13th largest life insurance company, in October 1999, making two capital injections totalling Y206bn (approximately $2bn) between March and September 2000. Unlike its US competitors, Axa did not go in for asset stripping, neither did it attempt to renegotiate policies and cancel the high dividends.

Clearly this represented an enormous financial gamble. However, executive director Hisashi Ohgaki, chief products and marketing officer, says it gave Axa credibility in the eyes of Nichidan's policyholders - both current and future - that was priceless. "It showed that Axa could be trusted, that we were seriously committed to Japan and that we were here to stay," he says.

The new company, Axa Nichidan Insurance Holdings, subsequently changed its name to Axa Insurance Holding at the start of this year as part of a strategy to enhance the global Axa brand.

The two wholly-owned subsidiaries, Axa Nichidan Life and Nichidan Life have also changed their names to Axa Life Insurance and Axa Group Life.

Axa Life Insurance focuses on individual insurance and individual annuity and Axa Group Life on group insurance and group annuity.

As the eloquent, ebullient Mr Ohgaki explains, Nichidan's core client base, now transferred to Axa Group Life, is the 560 small and medium-sized members of the Chamber of Commerce and Industry (CCI). "Axa has retained virtually 100% of its CCI clients," claims Mr Ohgaki.

It was not only dealing with a global brand name that has reassured corporate clients, says Mr Ohgaki, but Axa's willingness to provide the range of benefits and services that employees of large companies have always enjoyed; insurance products that are innovative and tax advantageous.

Chief among these products is Axa Passage, the umbrella name for a series of packaged products launched in December 2000. Three variations of the basic package have been introduced. One is Axa Passage Education which uses a variable annuity to accumulate education funds. It insures children up to the age of eight and includes services such as childcare and educational services based on points accumulated by the policyholders.

Axa Passage Healthcare, meanwhile, comprises whole-life medical insurance that covers unexpected hospitalisation and accidents as well as advanced medical treatment.

Based on the number of policies in force in 1999, Axa currently holds around 29% of the medical insurance market (excluding cancer). Its customers extend from some of Japan's largest companies and institutions, including Hitachi, Toshiba and the National Police Agency, to individual consumers.

For fiscal 2000 Axa increased the sum insured of new individual life and annuity insurance by a strong 28.4% (see table). The amount of claims paid decreased significantly to 87.5% of the previous year's level.

The strengthening of the company's asset portfolio over the last financial year and the settling of bad loans inherited from the previous owner has also been critical to Axa's long-term stability in Japan.

Plans to expand

Yet in spite of these achievements Axa, with a 2.5% share of the Japanese life market, is only a medium-size player. Group chairman Claude Bebear told the Nikkei Financial Daily in late May that he intends to double the group's Japanese life and non-life business through further acquisitions.

Japan is clearly regarded as an immensely promising long-term prospect by Axa, in part because of its demographic profile. Japan is the fastest-ageing society in the industrial world: by the year 2020 one in three of the population will be over 65. Inevitably, this is placing an enormous strain on the state and there is a growing trend - heavily encouraged by the government - for self-protection. Many Japanese of all generations are taking out private medical insurance to top up their company schemes.

Mr Ohgaki believes this trend is irreversible. "The future treasure for Axa lies with our senior citizens," he says.

Later this year, the introduction of defined contribution plans similar to the 401(k) plans in the US seems certain to go ahead. This will allow life companies, as well as non-life insurers and trust banks, to become asset managers. This is good news for Axa, which is the second largest fund manager in the world.

Axa has already introduced specific products such as the variable life insurance 'Global Mix' to accustom the Japanese to this new way of managing their assets and it says the response has been very positive.

 AXA'S JAPANESE LIFE BUSINESS (Y100m)                                            Fiscal       Fiscal           %                                              1999         2000      change In-force sums insured Individual life                           131 201      132 109         0.7 Individual annuity                         25 563       23 398        -8.5 Group life                                147 069      131 722       -10.4 Group annuity                               9 953        9 294        -6.6 New business sums insured Individual life and individual annuity     15 882       20 391        28.4 Group life and group annuity                  836          709       -15.2 
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