NU Online News Service, July 5, 12:59 p.m. EDT
The Japanese property and casualty insurance industry is expected to improve its earnings within the next year-and-a-half as adjustments the industry has made takes effect, says Moody's Rating Service.
In a statement yesterday, Moody's Japan K.K. says it revised its outlook for the Japanese P&C insurance industry to stable from negative.
This change mainly reflects Moody's expectation of a recovery in underwriting profits through changes to pricing strategies and reductions in costs.
Moody's says that the stable outlook is based on four positive developments.
• Various upward revisions in pricing for auto insurance products, including the application of a new grading system, have been implemented, or are underway. Moody's expects these measures to positively impact on insurers' profits as early as fiscal year 2013, helping them achieve a total business combined ratio of 95-97 in ensuing years.
• The industry is moving towards optimizing its domestic business resources—such as through staff reallocations and the integration of information systems—thereby reducing its cost ratio.
• Sales of high-risk assets, notably Japanese stocks, will continue. Given the significant size of the existing portfolio, changes will occur incrementally, but they will steadily reduce the financial volatility that such assets present to the industry.
• New investments in non-Japanese franchises—in both the life and non-life sectors—will continue and help diversify the underwriting and market risks that are currently concentrated in Japan.
On the other hand, Moody's says it recognizes downside risks to the improved outlook. These risks include a reduction in the number of policyholders due to the price hikes for auto insurance, rapid rises in the risks associated with expanding business outside Japan, and additional large losses arising from natural disasters—one or more of which can delay the recovery in, or even weaken, the industry's capitalization.
Moody's further notes that a subdued global economy and the risk of further appreciation of the yen would reduce the value of the industry's foreign financial portfolio and returns, and narrow its options in regard to domestic investment products.
The rating service says it also continues to assume weak domestic demand growth for insurance and low investment returns.
Moody's industry outlook expresses the rating agency's expectations for the fundamental credit conditions in the industry over the next 12 to 18 months.
A fuller explanation of its outlook will be discussed in a new report, "Japanese Property and Casualty Insurance Industry – Returns to Stable Outlook: Recovery in Profitability in Sight" to be published shortly, Moody's says.
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