Major and second-tier life insurers’ dismal earnings reports for fiscal 1998 have cast yet another shadow over the industry, already shaken by the recent collapse of midsize Toho Mutual Life Insurance Co.
Most of the 14 insurers suffered falls both in outstanding personal life insurance contracts and premium revenues, a trend that started in the previous fiscal year following the failure of Nissan Mutual Life Insurance Co. in April 1997.
In the meantime, negative spreads between low investment returns and high yields promised to policyholders totaled 1.56 trillion yen for 14 firms, weighing heavily on their financial health.
Solvency margin ratios — a key gauge of insurance firms’ vulnerability to risks — rose at many companies.
But financial analysts say the solvency margin ratios are not almighty, noting many insurers took out subordinated loans or issued subordinated deventures in the past fiscal year to help push up their ratios.
“Insurers can tinker with their ratios by 100 percentage points or so,” said Nobuyasu Uemura, a senior analyst at Japan Rating and Investment Information Inc. “If one firm has a solvency margin ratio of 400 percent and the other has one of 800 percent, it’s obvious that the latter is financially healthier. But you can’t really tell how sound the firm with 400 percent is.”
Some analysts warn that heavy reliance on subordinated debt — whose repayment priority is lower than other types of loans and obligations and can be partly counted as capital — will add a financial burden as they carry higher interest rates.
Further complicating matters, three of the seven major life insurers — Sumitomo Life Insurance Co., Mitsui Mutual Life Insurance Co. and Asahi Mutual Life Insurance Co. — switched to the so-called cost-accounting method, a new option that became available in filing earnings reports in fiscal 1997. They booked the value of their securities holdings at purchase prices, thereby managing to keep market fluctuations from severely affecting their balance sheets.
Another accounting regulation change, which has allowed the frontloading of expected future returns on corporate taxes, also helped improve the appearance of most insurers’ balance sheets.
“But just because the accounting regulations have changed, it doesn’t mean the insurers’ fundamental health has suddenly improved,” said Keiko Mizuguchi, a former Standard & Poor’s analyst who is now director of rating advisory services at Price Waterhouse.
Experts say it’s too early to declare the worst is over for the ailing industry.
Moody’s Investors Service, in a special report released this week, said the insurance industry’s standing is shakier than that of the banking industry, which received 7.46 trillion yen in public funds in March and wrote off a significant portion of nonperforming loans at the end of fiscal 1998.
The collapse of Toho Mutual Life Insurance Co. has provoked concerns over the Life Insurance Policyholders Protection Corp., an insurance industry safety net established in December with the participation of 47 life insurers.
In contrast to the banking industry, to which the government last year pledged 60 trillion yen in systemic support through recapitalization and depositor protection, life insurers only have a safety net funded solely by their premiums to turn to if one of its members fails.
At this point, the safety net has only 15 billion yen, although insurers plan to gradually increase that amount over the next 10 years to 400 billion yen. But even the 400 billion yen “will be depleted by the failure of one midsize insurer,” the Moody’s report says.
While policyholder reaction to Toho’s collapse seems calmer than that to Nissan’s failure in April 1997, the industry will inevitably see a rise in policy cancellations, Uemura said.
Experts say there is no magic trick to turn the industry around.
Uemura said the firms should raise their profitability by focusing on products and services in which they excel, instead of trying to offer a full range of products.
He added that the firms should also review the pay scale for the large number of agents they currently employ.
Mizuguchi meanwhile said insurers should learn how to manage risks involved in their asset management. “They would not have suffered from negative spreads in the first place if they had analyzed their risks well,” she said.