S&P Sees Japan P/C Sector as ‘Stable’

Standard & Poor’s Ratings Services latest report on the Japanese non-life industry concludes that, despite large payouts the sector remains relatively stable.

However, 2006 was not a particularly good year. S&P indicated that Japan’s “top nine non-life insurers recorded net underwriting losses in fiscal 2006 (ended March 31, 2007), with after-tax profits down 19.1 percent year-on-year.” While net premiums written “increased marginally,” the industry paid out a lot more in claims related to Typhoon Shanshan and additional payments compensating policyholders for the nonpayment of claims in prior years.

“Nevertheless, the Japanese non-life insurers have maintained solid capitalizations,” which underlies S&P’s “overall stable outlook on the industry.” S&P also indicated that of the 16 non-life insurers it rates “including the top nine non-life insurers, all have insurer financial strength ratings of ‘A-‘ or higher,” while 15 of the companies have stable outlooks. The exception is Nisshin Fire & Marine Insurance Co. Ltd., which has had a positive outlook since it became a wholly owned subsidiary of the Millea group in September 2006.

However, the insurers recorded ¥82.7 billion ($680 million) in net losses in insurance underwriting, marking a dramatic downturn from the ¥45.9 billion ($377 million) profit in 2005, due mainly to claims from Typhoon Shanshan, which cost Japan’s non-life insurers payments totaling ¥132 billion ($1.08 billion).

Those losses, however, were offset by “Japan’s recent stock market stability,” S&P explained. “The top nine non-life insurers together posted more than ¥8.5 trillion [app. $70 billion] in total latent gains on domestic stock, an increase of more than ¥214.3 billion [$1.76 billion] year-on-year.”

In light of the risks facing Japan’s non-life insurers – mainly “major natural disasters and market risks such as stock holdings for business purposes -” S&P underlined the “importance of enterprise risk management (ERM),” which is expected to increase. The non-life insurers “will need to manage diverse and complex risks comprehensively as they push into the life insurance business, including the third-party sector, and expand their businesses overseas through M&A activities,” said S&P. “Also of importance will be a strategic risk-management perspective that focuses on optimizing returns, in addition to managing downside risks.”

S&P went on to indicated that the current impact on each company’s business franchise from proceedings concerning the non-payment on a number of policies has so far had a limited effect. “However,” S&P warned, “the problem has caused policyholders to lose trust in the insurance industry overall, and there is urgent need for the insurers to drastically improve their operations and regain the trust of customers.

“In fiscal 2007, as operational costs are expected to increase, there is concern that profitability will be pressured from the high likelihood of an increase in expense ratios. A second wave of industry restructuring may occur if nonpayment problems persist through the long term, weakening the insurers’ operational efficiency and leaving the companies with business structures unable to secure stable profitability.”

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

An English-language report will soon be available on RatingsDirect, Standard & Poor’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.