Principal Insurance is new to Asia having opened its Hong Kong office in 1994 with managing director Rex Auyeung as a one-man band. Its confidence lies in its US parent, which has over 60 years of experience in the US pensions business with a strong foothold over 401K plans. Principal made a global profit of $710 million in 2001, helping to back up talk of expansion and acquisition in Asia.
This month it picked up PensionsAsia's Achievement Award for funds management in the one-year Hong Kong total plan category. The company pulled off one of the largest IPOs of 2001 in its transition from mutual organization to a publicly traded company in the US. In Asia, Principal is active in Hong Kong, Japan, India and developing a base in China aiming to make the region a more significant portion of the $120 billion global assets.
FinanceAsia interviewed Hong Kong-based Auyeung to talk strategy.
FinanceAsia: You have joint ventures in Japan and India and several distribution partners in Hong Kong. What do you look for in a joint venture partner?
Auyeung: We look for an organization that can give us brand and distribution. Owning your own distribution force is too expensive and it's difficult to hold onto agents if you only offer a narrow product range. In Hong Kong we have a multiple distribution strategy with both insurance companies and banks selling our products.
What is the future for MPF providers? Will consolidation occur and how will this be achieved?
The first wave of funds into MPF favoured HSBC, which is not surprising given its huge brand name in this city. It's difficult to ascertain exactly how many assets everyone has because the government does not publish the overall figures, but we estimate we have over 6%. From our analysis we believe that 5% of total assets is the critical mass required to make profit out of MPF. My forecast is to breakeven by the end of 2002, which is optimistic and sooner than many of our competitors. We can do this because of our ability to leverage our technology and experience from the US.
Yes consolidation will occur. Twenty providers is too many in a small market like Hong Kong and we have had open discussion with the regulators about this. I think a lot of providers are not happy with the assets they are gathering but the issue of keeping face in Asia means it's hard for people to accept defeat and leave the market. Nonetheless, in two years, we believe it should consolidate to between eight and 10 players and we expect to be one of them with up to 20% of assets.
We will achieve these aggressive targets through acquisition. We are looking to acquire another MPF provider.
Defined contribution (DC) has been a disappointment for many foreign companies in Japan. Has this influenced your strategy for Japanese pensions?
We're still committed to Japan. It is a tremendous market on paper but it's a longer-term project for us. We accept it is tough and doing business there takes a little longer. In Japan we expect to breakeven in about 10 years, a projection that has lengthened since the DC product was launched. Everyone has been going after market share by dropping charges to attract assets and this affects the breakeven equation. Going into Japan also required more investment as there was more customization work due to the regulatory requirements of the Japanese government.
Why did you form a joint venture with ING (ING Principal Pensions Company) in Japan?
Distribution and brand were the key factors but also corporate philosophy. We talked to a lot of companies and we found that ING and Principal share a very similar philosophy. We did not chose to form a joint venture with a Japanese company or join one of the consortiums for several reasons, but mainly because we wanted to enter the market as an administrator and product provider and leverage our own technology thereby saving a lot of money on infrastructure costs.
How do you find insurance companies differ from banks in their approach to the pensions industry?
The main difference is that we're not expecting quick results. The typical view of an investment bank is getting the highest return in the shortest period of time. We're looking at the long term and asking whether we are creating value that gives consumers a decent return - decent means a decent retirement life; higher than inflation. Our pace is slower but the direction is the right direction. Once we establish ourselves and absorb the development costs the returns will be steady. We are ultra conservative as a company and we take calculated risks. This doesn't mean that we don't do anything new but we take our time to consider and once committed take a long-term view.
What about new markets opportunities for Principal?
China is the next big market we are spending a lot of time researching. It's premature at the moment so we are sitting on the sidelines and doing our own lobbying behind the scenes and waiting for Chinese government to announce its intentions for the pensions market. We have two representative offices in China but we think we need to acquire or find a joint venture partner and are talking to some companies already. In India we already have a joint venture with the Industrial Development Bank of India, (IDDI) which is a distribution channel and we provide mutual funds products. There is pensions reform on the horizon there and we are poised to act.