S&P Reports on Japan Non-Life Sector

May 31, 2006

Japan’s non-life insurers posted largely improved profits in fiscal 2005, bouncing back from the previous year’s uncommonly harsh string of natural disasters, according to a report published today by Standard & Poor’s Ratings Services.

“While devastating in the U.S., Hurricane Katrina had only minimal effects on Japanese insurers,” S&P noted, “and while the threat of large disaster-related payouts still hangs over non-life insurers, the outlook on the industry is stable due to the companies’ relatively solid capitalization.

“Several key yardsticks for the industry turned up in fiscal 2005, pointing to the continued recovery in the domestic economy. The combined ratio (expense ratio plus loss ratio) range among the nine rated insurers deteriorated to about 100 percent in fiscal 2004, due to large losses from natural disasters.

“However, the ratios mostly recovered in fiscal 2005, declining to the lower 90 percent range for higher-ranked insurers. Similarly, the insurers posted underwriting profit of ¥45.9 billion [$4.1 billion] in fiscal 2005 as opposed to losses of ¥51 billion [$4.56 billion] the previous year. Net premiums written also increased by 1.0 percent to ¥6,562.3 billion [$58.65 billion], thanks to a 3.1 percent increase in revenue from fire insurance and a 0.2 percent rise in revenue from the core automobile insurance segment.

“The nine rated insurers recorded a 14.0 percent increase in interest and dividend income in fiscal 2005, thanks to higher dividend payouts on strong corporate earnings. Capitalization in the sector has further strengthened, backed by a ¥140.8 billion [$1.258 billion] increase in contingency reserves, which are earmarked for large disaster-related payments. “In addition, the insurers’ latent profits on stocks surged 70 percent from the thriving stock market.”

However, S&P warned, “not all has been smooth sailing for the non-life insurers, as the strong performance figures mask a number of underlying problems, particularly with their legal compliance. The Financial Services Agency (FSA) took administrative action against 26 non-life insurers in November 2005 because of large-scale illegal nonpayment of claims to policyholders. The FSA also harshly penalized Sompo Japan Insurance Inc. (AA-/Stable/–) on May 25, 2006, ordering the company to suspend sales of non-life products for two weeks after the agency uncovered a pattern of misconduct.”

S&P said: “Japan’s non-life insurers must strengthen their corporate governance practices and improve the transparency of their operations in order to recover the trust of policyholders. As competition intensifies, the performance gap between high-ranked and low-ranked insurers is widening, increasing pressure for M&As. Nisshin Fire & Marine Insurance Co. Ltd. (BBB+/Watch Pos/–) recently came under the Milea [Millea] Holdings umbrella, the core subsidiary of which is Tokio Marine & Nichido Fire Insurance Co. Ltd. (AA-/Positive/–).

“Forming strategic alliances with companies in other industries is one method through which the insurers may widen their distribution channels. Aioi Insurance Co. Ltd. (A/Stable/–), for example, is now considering plans to establish insurance companies within corporations in other industries.

“Regulatory changes instituted in April 2006 are likely to usher in more competition, such as from trading houses and retail distributors, who are now able to set up small-scale insurance operations. The result may be a second wave of consolidation in the coming years that could even include the high-ranked market players.”

The full report is available in Japanese via S&P’s Research Online at: www.researchonline.jp, or via CreditWire Japan on Bloomberg Professional at SPCJ .

An English-language report will soon be available on RatingsDirect, S&P’s Web-based credit research and analysis system. The report will also be available on S&P’s public Web site at: www.standardandpoors.com; under Credit Ratings in the left navigation bar select News & Analysis.

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