Pru-AIA deal holds peril and promise for fund managers

Fund-house execs are divided over whether the proposed $35 billion acquisition of AIA by Prudential is a potential boon or bane. And what about Hong Kong's MPF business?
Pru-AIA deal holds peril and promise for fund managers

Prudential's planned $35 billion takeover of the Asian insurance business of AIG would herald a landmark shift in the insurance sector, but also has the potential to affect the asset-management industry.

Fund executives will carefully monitor how the merger of two increasingly important distribution channels will affect their business, particularly now that a rival, Prudential Asset Management, may become more prominent.

With over 10,000 tied agents in Hong Kong alone, American International Assurance, AIG's Asian business, is by far the biggest insurance channel for investment-linked products in the region. It dominates the Hong Kong market and also has a leading role in Singapore.

Only in Taiwan has AIA removed itself from selling product in a market open to offshore funds, having sold its business to Nan Shan Life Insurance.

Anecdote suggests insurance firms are of growing importance to manufacturers of investment products. There is little in the way of published data on investment-linked product (ILP) sales. For example, neither industry bodies nor government regulators have any such information.

However, some fund execs say insurers played a stabilising role in 2009, when many banks lost interest in selling mutual funds. "Insurance channels have taken more market share since 2006, and in 2009 helped fund managers when banks slowed down," says Kerry Ching, head of distribution for Hong Kong at Fidelity International.

While the insurance sector may not ever be as vital a channel as the banks, ILP money tends to be much more stable, so it is seen as an attractive business for fund managers.

Ken Yap, managing director at research firm Cerulli Associates in Singapore, says insurance companies now make up 5-10% of market share in Asian fund sales, depending on the market. "If this purchase goes through, it will make Prudential a giant in the region, with the biggest chunk of that 5-10%," he adds.

Although some fund execs say the deal won't affect their business, others say it could impact their distribution efforts.

Prudential has its own agency force, but its emphasis has been on bancassurance (via Standard Chartered), so its business is seen as complementary to AIA's. "Prudential's acquisition shouldn't affect AIA's existing ILP business, so it's a good mix," says Terry Pan, head of Hong Kong business at JP Morgan Asset Management.

Most ILP providers in Asia practise open architecture -- AIA is a distributor to many third-party fund manufacturers -- and fund execs would be pleased to see the ILP business attain focus and energy under new management. "This should be good for us and for other players," says Augustus 'Augie' Chen, Asia chief executive at AllianceBernstein.

However, the biggest winner may turn out to be Prudential Corporation Asia (PCA), which includes Prudential Asset Management. Ranked as the 24th largest manager of Asia-sourced assets by AsianInvestor, with $67.5 billion, Prudential Asset Management is estimated by Cerulli to derive more than 80% of AUM from its insurance parent's various onshore businesses.

It is likely to take one or two years for the outcome to be known, as the insurers will initially concentrate on retaining existing business. Prudential will have to deal with the huge debt it must undertake to complete the deal, while keeping happy an AIA salesforce that until this weekend thought it was going to benefit from AIA going public.

The big question for fund managers is the extent to which Prudential AM could end up running AIA's ILPs as yet another captive business. Tidjane Thiam, the London-based CEO of Prudential Plc, says in an internal memo released on the day the deal was announced, "Moving forward we will optimise our asset-management business as a core competancy of the group."

It is unlikely that Prudential AM could gobble up a huge amount of the business, partly because the AIA ILP portfolio is so large and diverse, comprising over 100 different funds, and also because the agents want to sell best-of-breed products. But at this point there is the possibility that some portion of this work will be steered Prudential AM's way.

Of course, the opposite could materialise: Prudential may open its platform more to open architecture, which would benefit the funds industry.

Another question mark hovers over AIA's recently established private-wealth management unit under Steven Chiu. This was set up last year in reaction to the sale of AIG's investments business to Pinebridge. But sources say the division is still getting its licences from regulators in Hong Kong and has yet to start actively managing assets for clients.

Although PCA has no equivalent, because its wealth-management unit is still embryonic, its ultimate fate is unknown. Fund managers hope it is sustained in some form, as it represents a different channel for their products.

A third unknown concerns the fate of AIA and Prudential's respective joint ventures in Hong Kong's Mandatory Provident Fund (MPF) retirement system. AIA's tie-up with JP Morgan is the third largest MPF provider, with HK$30 billion ($3.9 billion) of assets, while Bank of China International-Prudential is fourth, with HK$10 billion, according to Towers Watson.

JP Morgan's Pan says his firm has no information on Prudential's intentions with regard to the MPF market. Assuming the AIA acquisition goes through, at some point AIA, JP Morgan and Prudential will have to discuss their strategic intentions.

Matters in China and India should be more straightforward, at least with regard to asset-management activities, as their local JV businesses don't overlap.

Prudential's top brass in Asia will certainly be very familiar with the business they acquire, as many used to work at AIG until recently. PCA is led by Barry Stowe, who joined as CEO in 2006 after 11 years at AIG Life, including as president of accidental and health worldwide.

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