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30 Jan 2001
MOODY'S MAINTAINS STABLE OUTLOOK ON JAPANESE NON-LIFE INSURANCE SECTOR, BUT WARNS OF LONG-TERM DANGERS
Tokyo, January 30, 2001 -- Moody's Investors Service has kept its rating outlook for the Japanese non-life insurance industry unchanged following its most recent review of the sector: Moody's outlook is stable for the medium-term and negative for the long-term. The rating agency's findings are found in its recently published Japanese Property & Casualty Insurance Industry Outlook.
"The outlook needs to be seen in the context of a sector that holds some of the highest ratings among financial institutions and corporations in Japan, but which nonetheless is faced with low investment yields and falling premium revenues, predominantly as a result of poor economic conditions and increased price competition," says Rafael Villarreal, a Moody's VP/Senior Credit Officer and the report's principal author.
"These groups may soon be facing underwriting losses, despite their formidable franchises and notable financial strength," adds Villarreal.
Nonetheless, Moody's notes that the Japanese non-life sector is relatively unaffected by poor credit quality in loans and has limited exposure to the property market. The sector has managed until now to report consistent underwriting profits whereas its life insurance peers have not been as fortunate. Some non-life participants now stand to benefit from this comparative strength by entering the life assurance and financial guarantee businesses, and most participants are also providing long-term nursing care and other products.
Moody's believes that the recent consolidation experienced in this already highly concentrated sector differs from those in other markets, where they are driven primarily by shareholders, value creation philosophies, and policyholder demands and often entail new distribution channels, enlarged product ranges and new customer segments. Most of these elements are not present in Japan. Furthermore, Moody's argues that mergers in this market cannot be about achieving economies of scale, because last year a dozen groups controlled over 80% of what is the second largest non-life insurance market in the world.
Rather, the driver has been "management's realisation of the irreversible and pervasive nature of the changes set off by tariff liberalisation and deregulation. Mergers are firstly a defensive move, an attempt to slow down the process of change to a manageable pace," commented Hideyuki Ito, an AVP/Senior Analyst with Moody's and one of the authors of the report. Ito believes slowing down the pace of change will be a challenge, but Moody's stable outlook denotes some confidence in the ability of the largest players to do just that.
Moody's concern, however, is that market forces cannot be easily controlled and events may overtake management's efforts. Broad operating cash flow indicators show a steep negative trend that started years before tariff liberalisation was implemented, back in July 1998.
"Should competition intensify at a faster rate than insurers can manage to offset through the creation of alternative sources of revenue and through cost cutting exercises, companies would very likely incur losses and begin to lose capital, which could eventually lead to downgrades," comments Villarreal.
Moody's believes that mergers, by themselves, do not resolve inefficiency problems although they are likely to provide (i) a potentially large source for cost synergies to counter the fall in revenue and (ii) orderly competition. Because of the low investment yields in Japan and falling premium revenue as a result of economic conditions and price competition, these groups may soon be facing underwriting losses. "Some companies are now borderline and only a few years ago seemed to think underwriting losses were unlikely," comments Ito.
Business diversification may counter current trends, but Moody's does not expect material revenue synergies as a result of these mergers soon for at least three reasons: (i) this is a mature market in some lines of business; (ii) economic conditions are not favourable; and (iii) the existing distribution practice, where the agent and the policyholder are often connected by some personal or corporate affiliation. In Japan, agents channel virtually all business to insurers. "One needs to consider that, with a few exceptions, mergers have been among companies of the same family groups," Ito points out.
If the process of change towards truly free markets is controlled by the resulting mega- groups, then ratings could remain stable because capital losses could be deferred or, in the best cases, avoided altogether. This could give companies more time to implement strategies that will better prepare them for a truly open and competitive market. Because of the large concentration of a few large players with common goals and weaknesses in this market, managed competition will provide relative stability.
It is partly as a result of this set of somewhat manageable conditions that Moody's also announced that it would change its rating outlook on Yasuda Fire & Marine to stable from negative.
Moody's rates the following companies in Japan for insurance financial strength:
Chiyoda Fire & Marine -- A2, positive rating outlook
Dowa Fire & Marine -- A2, stable rating outlook
Dai-Tokyo Fire & Marine -- A2, positive rating outlook
Fuji Fire & Marine -- Ba1, negative rating outlook
Koa Fire & Marine -- A3, positive rating outlook
Mitsui Marine & Fire --Aa2, stable rating outlook
Nichido Fire & Marine -- Aa2, stable rating outlook
Nissan Fire & Marine -- A2, positive rating outlook
Nippon Fire & Marine -- A1, stable rating outlook
Sumitomo Marine & Fire -- Aa2, stable rating outlook
Toa Reinsurance -- A1, negative rating outlook
Tokio Marine & Fire -- Aa1, stable rating outlook
Yasuda Fire & Marine -- Aa2, stable rating outlook
Zurich Insurance Company (Branch) -- Aa1, stable rating outlook
NOTE TO JOURNALISTS: For more information, please contact New York Press Information +1-212-553-0376; London Press Information +44-20-7772-5454; David Frohriep in Paris +33-1-5330-1062; Juan Pablo Soriano in Madrid +34-91-310-1454; Michael Buneman in Milan +39-0286-337-470; Anita Poppi in Sydney +612-9270-8100; Juergen Berblinger in Frankfurt +49-69-707-30-700; Hideaki Hoshina in Tokyo +813-3593-0734; Hilary Parkes in Toronto +1-416-214-1635; Lorraine Yee in Hong Kong +852-2916-1112; Christiana Aguiar in Sao Paulo +55-11-3043-7186; or Benito Solis in Mexico City +525-261-8784.
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