S&P Comment on Japanese P/C 1st Half Results – Profitability Still in Question

Standard & Poor’s Ratings Services has issued a comment on the Japanese P/C sector, indicating that “a recovery in bottom-line profits recorded by all 10 major Japanese non-life insurers for the first half of fiscal 2003 (ended Sept.30, 2003), was largely a result of a substantial decline in sales and devaluation losses on securities following a broad rise in domestic stock prices after March 2003.”

S&P Tokyo-based credit analyst Runa Ichihari, stated: “In our view, a recovery in the insurers’ capitalization and profitability now rests on their respective abilities to reduce equity holdings as planned and increase underwriting profits.” The report notes that rising stock prices has “alleviated the pressures on the 10 major non-life insurers’ bottom-line profits and capital, and the companies have built up price fluctuation and catastrophe reserves.”

However, S&P said it still considered “stock price volatility to be one of the major risks for the Japanese non-life industry, given that domestic equities holdings still exceed 20% of the major non-life insurers’ investment assets.”

The rating agency also pointed out that persistent stagnant growth in the insurers’ core businesses “remains another concern for their credit quality.” It noted that “net premiums written, excluding the impact from the abolition of automatic reinsurance on government pools regarding Compulsory Automobile Liability Insurance (CALI), decreased by 0.1% year-on-year for the 10 insurers. In particular, net premiums from automobile insurance, which account for about 50% of total premium income, are on a declining trend.”

S&P stressed that a “crucial factor for the major non-life insurers is their ability to revise their profit structures in pursuing growth.” It also indicated that the “wide gap between the larger companies, which benefit from economies of scale, and smaller companies in terms of their expense efficiency is expected to persist in the medium term. Given the prospects for low premium growth in the near to medium term, diversification of profit sources through leveraging their broad business franchises will be a key issue for the major insurers.”

It also noted that for “second tier non-life insurers, the trend of declining net premium income is even more apparent. Generally, room to cut expenses is limited at the second tier companies compared to the major insurers. As a result, the success of the midsize insurers in pursuing strategies focused on specific niche markets will play a large part in determining their ability to boost their credit quality.”

Topics Carriers Profit Loss Property Casualty Japan