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Standard & Poor’s Corp. said Friday its outlook for Japanese life insurers remains negative, as their earnings reports released earlier this week indicate continued business contraction, a severe environment of ultra-low interest rates and a weak stock market.

Life insurers will probably continue to cut expenses, reduce risk assets in their investment portfolios and shift to more profitable business areas, but the near-term benefits of such efforts will be limited due to the shrinking business and severe domestic investment environments, the U.S. credit-rating agency said.

“We expect the gap between Japanese life insurance companies to widen, with most players experiencing some weakening in their credit quality, and we do not rule out the possibility of additional failures in 2002,” said Tatsuro Kurogi, a credit analyst at S&P in Tokyo. “Continued flight to quality among increasingly credit-savvy policyholders may also precipitate the exit of marginal players from the market and lead to further consolidation.”

S&P noted that the earnings reports of the 10 major life insurers show a continued business contraction, led by declines in new business and high surrender and lapse rates, amid a drop in consumer confidence.

“These ills were compounded by the negative impact of falling stock prices and new accounting rules on how life insurers value their investment portfolios,” the agency said.

At the end of fiscal 2001, the Nikkei Stock Average had dropped by about 15 percent from the previous fiscal year, leading to evaluation losses of about 1.5 trillion yen and realized losses of about 900 billion yen on the insurers’ mainly domestic stockholdings, it said.

“These losses were large enough to wipe out domestic life insurers’ still ample underwriting profits, or ‘kiso rieki,’ which totaled about 2.1 trillion yen at fiscal yearend,” the agency said.

Japan’s life insurers are likely to face continued pressure on their underwriting profits amid sluggish business prospects and still high negative spreads — which occur when the guaranteed yields promised to policyholders exceed the actual investment returns earned by life insurers, S&P said.

“Life insurers are expected to cut into their still somewhat bloated operating costs in an effort to improve earnings, but such efforts are not likely to be sufficient to offset deteriorating profitability,” the agency said.

Said Kurogi, “We expect the consolidation of the life insurance industry to accelerate in the next few years as companies — be they mutual or stock, large or small — seek ways to survive.”

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