Japanese non-life insurers Sompo Japan Insurance and NipponKoa Insurance plan to merge, an industry source said, in the second deal in less than two months in a sector struggling with slumping demand and a dwindling, ageing population.
Japan’s non-life insurance industry is under pressure as car and housing insurance sales slide and the population falls, prompting rivals to join forces to cut costs.
The merger of the two would create a company with premium income of over 2 trillion yen ($20.7 billion), putting it third in the Japanese non-life insurance industry with a market share of more than a quarter.
Shares in Sompo, the country’s current No. 3 non-life insurer which has been losing money, rose 2.6 percent, while those of fifth-ranked NipponKoa, which is profitable, tumbled 10.1 percent. They would have a combined market value of about $10 billion.
“The merger report is not something that investors particularly liked,” said Fumiyuki Nakanishi, manager at SMBC Friend Securities.
“The deal is aimed at survival in a shrinking market, as opposed to forward-looking mergers and acquisitions such as those taking place overseas or in growth areas.”
Japan’s non-life insurance market, which was worth about 7.5 trillion yen [$78 billion] in the year to March 2008, has been stuck in decline, hit especially hard by falling car sales.
In the past, insurers were able to make up for losses in their core insurance operations with their investment returns. But the global financial mess has ended that.
Japan’s top seven non-life insurers plunged to a combined loss of 20 billion yen [app. $210 million] in the nine months to December from a profit of 270 billion yen [app.$2.81billion] in the same period a year earlier, according to the Nikkei business daily.
Sompo Japan, which has been strong in car and fire insurance, suffered a net loss of 594 million yen [$6.18 million] in April-December, while NipponKoa, which has strong sales through regional banks, made a net 20 billion yen [$210 million]. Revenue shrank at both firms.
“We believe that scale is the key driver of this deal,” said Makarim Salman, analyst at Macquarie Capital Securities in Tokyo. “The larger clout should also allow the insurer to compete more effectively internationally — an important strategy given Japan’s changing demographics.”
Mizuho Securities analyst Koichi Niwa said the challenge for Sompo and NipponKoa as well as their rivals would be how they spend the money they save from merging.
“One possibility is expanding into the life insurance area and another is overseas, especially in Asia,” he said about the media reports on the deal.
He said that consolidation has pretty much run its course in the non-life insurance sector so the next moves are likely to be in the life insurance sector, which is also facing weak growth.
The comments from the industry source, who declined to be named because the deal is not yet public, confirmed a report in the Nikkei business daily, which said Sompo and NipponKoa may announce by the end of the week plans to merge by the spring of 2010. The Nikkei did not cite its sources.
U.S. investment fund Southeastern Asset Management is a major shareholder in both Sompo Japan and NipponKoa and has been pushing NipponKoa to consider a merger or alliance with another non-life insurance or financial firm.
No. 2 Japan non-life insurer Mitsui Sumitomo Insurance and two other rivals said in January that they would merge to create the country’s top non-life insurer by revenue, putting them ahead of current leader Tokio Marine.
Sompo Japan and NipponKoa said in separate statements after the Nikkei report that nothing had been decided.
Sompo’s shares rose 2.6 percent to 473 yen (4.91] while NipponKoa’s stock dropped 10.1 percent to 597 yen [$6.20]. Other non-life insurers fell, with Tokio Marine tumbling 5.5 percent to 1,914 yen [$19.88]. The Nikkei stock average fell 2.4 percent. (Reporting by Reiji Murai, Taiga Uranaka, Yumiko Nishitani and Aiko Hayashi; Editing by Hugh Lawson)
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