S&P Says Japan Insurers Under Pressure

By Mark E. Ruquet

Standard & Poors and Moodys Investors Service have come out with differing views of the Japanese property-casualty insurance market, which have a mix of implications for the industry.

In a recent report, the New York City-based S&P said that the Japan p-c insurance industry remains under severe pressure despite improving performance.

S&P said the carriers operating in Japan face difficulties despite cutting operating expenses and the absence of losses caused by large-scale natural disasters in the last fiscal year.

Earlier, in a separate report, Moodys gave Japanese p-c insurers an “A” rating overall. Moodys cited the companies “solid financial fundamentals and sound profitability” that is due to a concentration of business in automobile and property insurance.

S&P, in its report titled “Industry Report Card: Japans Non-Life Insurers,” concluded that overall profitability remains weakened by a deterioration in investment performance, mainly due to falling stock prices.

“A substantial improvement in the business and investment environment is not likely in the short term, and the outlook for the credit quality of the overall industry remains negative,” said Runa Ichihari, S&Ps analyst in Tokyo and the author of the report.

“Expense ratios have declined in general, as insurers continue to aggressively reduce costs and reorganize agent networks,” she continued in her statement. “However, a drop in profitability from asset investment activities continues to threaten overall profitability.”

Non-life insurers capital bases, which had been regarded as relatively solid in the Japanese financial sector, have also shown signs of erosion, said S&P.

Although industry-wide consolidation has subsided, a new phase of price competition in auto insurance and other core businesses is likely, S&P continued.

“The crucial factor for stable profitability continues to be underwriting based on prudential risk management, in addition to cost reductions,” Ms. Ichihari said.

In its report, Moodys noted that since deregulation of the industry in Japan in 1996, the market has consolidated to 6 major groups that still need to deal with the challenges of “new players, price competition and the restructuring of its distribution channels.”

Moodys said it thought continued change for the industry would be slow, but that it benefits from “highly concentrated market structure, strong capitalization, and moderate underwriting profits in the short and medium term.”

The rating service, however, cautioned that Japanese companies did not have the resiliency of American and European companies should they suffer severe losses.

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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S&P Says Japan Insurers Under Pressure

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