S&P Reports on Japan’s Non-life Insurers

May 28, 2004

Standard & Poor’s Ratings Services has issued a report on the unconsolidated financial results of Japan’s 10 major non-life insurers for fiscal 2003 (ended March 31, 2004), indicating that they are “within its expectations and will not affect its ratings on the companies.”

S&P said, that its “outlook on the industry has improved to stable from negative. Of the 10 insurers rated by Standard & Poor’s, eight have stable outlooks and one has a positive outlook, reflecting the relatively strong financial standing of non-life insurers within Japan’s financial sector.”

The rating agency noted, however, that “net premiums written remain depressed and continue to place pressure on the operating performance of the companies. In addition, the insurers’ earnings and capitalization, although strong relative to the underwriting and asset risks the insurers are taking, remain vulnerable to stock price fluctuations.”

It also said that “revaluation losses and losses on sales of stock holdings have decreased substantially as a result of efforts by the companies to reduce risk assets by disposing of cross-share holdings since domestic stock prices started to recover in March 2003. The asset portfolios of the insurers are less vulnerable to fluctuations in stock prices than they were two years ago. Nevertheless, further improvement in their financial profiles will depend on their ability to further reduce equity holdings, which still account for the majority of their invested assets.”

Japan’s major P/C insurers have also profited from “a reduced incidence of natural disasters and cost cutting,” as a result S&P indicated that “the combined ratios of most of the non-life insurers remained in the mid 90 percent level (excluding benefits from the termination of an obligatory government reinsurance program on compulsory automobile liability insurance, CALI).

“However, there are some disparities in profitability among the companies. Financial results for fiscal 2003 reveal a gap of more than 10 percentage points between the lowest combined ratio, at 89.0 percent, and the highest, at 100.4 percent, with a 5.8 percentage point difference in the expense ratio and 8.2 percentage points in the loss ratio.”

The report also noted that the “speed of improvement in cost efficiency has not always correlated with the scale of improvement even among the merged companies.” It added that “substantial improvement in the expense and loss ratios of Japan’s non-life insurers is unlikely in the short term, given probable continuing pressure on premium income amid a decline in unit prices of core auto insurance products.

“In the medium to long term, rationalization and diversification of profit sources will be necessary for further growth. For second-tier insurers, which do not benefit from significant economies of scale, maintaining their business franchises will require specific strategies focused on niche markets. Such strategies will require the full utilization of their managerial resources, which are more limited than those of the larger companies.”

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