S&P Maintains Negative Outlook on Japan’s P/C Insurers

May 23, 2002

Standard & Poor’s announced that its outlook on Japan’s non-life insurance industry remains negative following the release this week of insurers’ financial results for fiscal 2001.

“Earnings continue to be pressured, while investment income remains weak due to low interest rates and the volatile domestic equity markets,” S&P said. It also noted that “In terms of the impact of the terrorist attacks in the U.S., significant losses related to exposure to U.S. reinsurance pools were incurred by two insurers.”

While indicating that “the overall credit quality of the non-life industry continues to be relatively strong within the Japanese financial sector,” S&P anticipates that “earnings from traditional businesses are expected to remain under pressure amid increasing competition, which is likely to lead to deterioration in the capitalization of some industry participants.”

This will probably lead to a wider divergence of ratings between Japan’s leading p/c insurers and weaker companies, according to Runa Ichihari, a director at Standard & Poor’s in Tokyo.

S&P’s bulletin indicated that in general,” excluding Aioi Insurance Co. and Nissan Fire, which suffered from significant losses related to U.S. Reinsurance pools,” most of the Japan’s 11 largest companies improved their loss ratios in 2001. This result was for the most part due to “smaller losses related to natural disasters in the domestic market in 2001 compared with previous years, and declining loss ratios in companies’ automobile businesses, supported by strengthened underwriting.”

The report discussed the fact that through mergers and cooperative agreements Japan’s p/c industry was becoming increasingly dominated by five major insurance groups. But Ichihari noted that, “Regardless of their size, mergers or alliances implemented without focused strategies to differentiate the participants from their competitors will not contribute to stronger earnings in the short term.”

She added that, “We believe that solid insurance underwriting based on prudent risk management and expense control will be key factors to achieve sustainable earnings,” and explained the negative outlook as expressing S&P’s conclusion that pressures on earnings will continue as premiums remain stable and investment returns can’t be expected to increase in the near term.

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