S&P Analyzes Earthquake Threat for Japan’s Property/Casualty Companies

September 12, 2005

“The one-two punch of insurance payouts and share price losses following a major earthquake in Tokyo would not immediately jeopardize insurance companies’ ability to pay claims, but could have a negative impact on insurers’ credit quality,” according to a report published today by Standard & Poor’s Ratings Services.

S&P said: “Japanese nonlife insurance companies have sufficient reserves to handle direct payouts, but devaluation of their large equity portfolios would have a more debilitating effect on their capital. With the recent outbreak of large earthquakes throughout Japan, the number of individual subscribers to earthquake insurance is growing. Corporate demand for earthquake insurance is on the rise due to greater cash on hand and increased focus on risk management.”

The rating agency indicated that it has “calculated that gross payouts from the Japanese nonlife insurance industry (the 22 member companies of the General Insurance Association of Japan) would reach 6.6 trillion yen [around $60 billion] in the event of a major earthquake in the Kanto region on the scale of the 1923 Great Kanto Earthquake. Even after recovery of reinsurance claims, losses would still be more than 1 trillion yen [$10.9 billion].”

S&P said, however, also noted that a bigger concern for insurers, “would be falling domestic share prices. Nonlife insurers have large portfolios of domestic equities, making their capital bases highly vulnerable to fluctuations in stock prices. Should domestic share prices plummet following a large earthquake, revaluation losses would likely be much more than direct payouts on claims.”

S&P pointed out that “the sector has a high ratio of equity shareholdings to total assets, making their capital bases highly vulnerable to domestic stocks. Thus, from a catastrophe risk management standpoint, it is crucial for nonlife insurance companies to continue reducing their shareholdings.”

The full report is available in Japanese via Standard & Poor’s CreditWire Japan on Bloomberg Professional at SPCJ . The report “Can Japan’s Nonlife Insurers Survive The Big One?” will soon be available in English on RatingsDirect, Standard & Poor’s Web-based credit research and analysis system and Standard & Poor’s public Web site at: www.standardandpoors.com.

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