S&P Says Japanese Non-Life Insurers’ Mid-term Results in Expected Range

November 25, 2002

Standard & Poor’s announced that the mid-term financial results for Japan’s major non-life insurance companies were within expectations and would not immediately affect its ratings on the companies.

S&P said the overall financial results “reflected prolonged economic stagnancy and intensifying competition in the industry,” while “net premiums written remained stable except for a one-off increase related to a change in the government’s reinsurance pool system for compulsory automobile insurance.”

It also noted an overall improvement in the Japanese non-life sector’s combined ratio as a result of fewer large accidents and natural disasters that have produced lower insurance benefit payments. “As a result of efforts to reduce operating expenses, non-life insurers’ net business balance ratios have improved at most companies,” S&P director Runa Ichihari indicated.

The bulletin went on to note that “In the second half of fiscal 2002, insurers will not be able to avoid a slight increase in loss ratios partly due to the impact of Typhoon 21 on the greater Tokyo area. Nevertheless, non-life insurers are likely to secure underwriting profits even without the positive impact of the change in the compulsory automobile insurance system.”

It also stressed that “Japan’s non-life insurers are suffering from the difficult investment environment. In addition to declining interest and dividend income due to the persistent low interest rate environment and the deflationary trend in Japan, further declines in domestic stock prices have forced companies to post losses from sales and evaluations for two years in a row.”

“The fall in stock prices has continued and is having a negative impact on non-life insurers that had previously enjoyed ample unrealized gains and relatively strong capitalization compared with other institutions in the Japanese financial sector,” Ichihari continued. She indicated that “So far, the non-life insurers’ capital bases have not deteriorated sufficiently to merit ratings actions,” but warned that “any further decline in stock prices could lead to a review of ratings on insurers that have a large proportion of equity in their total assets.”

“Amid intensifying competition in the industry, merged companies may be able to generate quick improvements in operating efficiency and profitability. Small and medium sized non-life insurers, however, will need to secure profitability by implementing niche-business strategies to differentiate themselves from major companies, given the limited opportunities to take advantage of economies of scale,” the announcement concluded.

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