S&P to Review Sompo, NIPPONKOA Ratings on Merger Plans

March 12, 2009

Standard & Poor’s Ratings Services has said that a management consolidation plan between Sompo Japan Insurance Inc. (AA-/Stable/–) and NIPPONKOA Insurance Co. Ltd. (A+/Stable/–) could impact its ratings on the non-life insurers, depending on a rating review to be conducted once the plan is officially announced.

S&P noted that “some Japanese media reported today that the companies have decided to form a new insurance group under a holding company, though the companies themselves said there is nothing official to announce at this stage.” (See also above article).

“If the consolidation plan materializes, our analytical focus will be on how the new insurance group can improve profitability by enhancing efficiency while maintaining and expanding its domestic business franchise,” S&O continued.

The alliance would produce a new giant non-life insurance group with aggregate net premiums of ¥2.03 trillion [$20.7 billion] and total assets of ¥8.3 trillion [$84.77billion], based on the companies’ non-consolidated financial statements for fiscal 2007 (ended March 31, 2008).

“Sompo Japan is strong in automobile, fire, and other insurance products targeted at individuals and sold via agents, while NIPPONKOA boasts sales capabilities that use the distribution channels of regional banks and other financial institutions. The new group may be highly competitive if both insurers’ strengths are successfully maintained in this new group.

However, S&P also noted that if the “two insurers continue to exist separately under a holding company, which we expect them to establish, there will only be a limited reduction in operating expenses, even though the business risk inherent in consolidation will be limited and should not adversely affect business performance.”

S&P added that it analysis of the proposed deal will “also focus on whether the new group will be able to shift its management resources to other prospective businesses, while maintaining its position in the domestic non-life insurance business. If the two insurers operate as subsidiaries under the holding company, we are likely to reflect their respective positions as the group’s core operating entities in our ratings on the companies.”

Source: Standard & Poor’s – www.standardandpoors.com

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