Japan's insurers look abroad as profits fall

by Tomoko Yamazaki and Komaki Ito


Slowing premium growth may force Japan’s insurance companies to seek more takeovers abroad to counter declining profits in the world’s most rapidly aging country.

The seven biggest casualty insurers, including Tokio Marine Holdings Inc., this week reported a combined first-quarter profit of ¥70.8 billion, 37 percent lower than a year ago. Net premium income fell 0.6 percent on declining demand for auto insurance because fewer people drive.

Japan is the first developed country to register more annual deaths than births, with the elderly set to outnumber children two to one within five years, according to the health ministry. To counter falling premiums at home, Tokio Marine is buying Philadelphia Consolidated Holding Corp., and Dai-ichi Mutual Life Insurance Co. agreed to buy a stake in Tower Australia Group Ltd.

“Where there is population and economic growth, there are business opportunities for insurers, and that’s mainly in Asia,” said Hitoshi Yamamoto, chief executive officer of Tokyo-based Fortis Asset Management Japan Co. “It’s a given that Japanese insurers won’t have growth opportunities just looking at the domestic market.”

The trend is pushing Japan’s life insurers, mostly mutual societies owned by policyholders, to consider converting to stock ownership so they have shares to finance acquisitions.

Japan’s birthrate has slumped to the lowest level on record, and deaths outpaced births, surpassing 1 million for five straight years, data compiled by the Health, Labor and Welfare Ministry show. That means fewer new customers for the nation’s almost 100 life and nonlife insurance companies, and higher costs as people live longer in the world’s third-largest insurance market.

Tokio Marine, Japan’s biggest casualty insurer, posted a 42 percent drop in net income to ¥28.9 billion for the three months to June 30, while Sompo Japan Insurance Inc., the third-biggest, reported a 60 percent decline to ¥7.3 billion. Mitsui Sumitomo Insurance Group Holdings Inc., the second-biggest, reported an increase in profit for the quarter among the seven. Its net income gained 0.2 percent to ¥23.5 billion.

Japanese insurers may target countries in the 10-member Association of Southeast Asian Nations and what are known as the BRIC countries of Brazil, Russia, India and China, where rapid economic growth will create demand for insurance, according to Mac Salman, a Tokyo-based analyst at Macquarie Group Ltd.

Tokio Marine, Mitsui Sumitomo, Aioi Insurance Co. and Sompo are the best positioned of the nonlife insurers to benefit from international expansion, said Salman. He named Mitsui Sumitomo as the most likely candidate to follow Tokio Marine with an acquisition this year, probably in Asia.

“We expect the larger nonlife insurers to seek overseas opportunities,” Salman said. He predicted that Tokio Marine would soon acquire a U.S. insurer in a report dated July 3. “Diversification of the business portfolio strengthens earnings and is important from a risk management perspective.”

Tokio Marine has spent about $2 billion since 2002 on purchases in countries including China, Malaysia and Thailand. One of its units purchased Lloyd’s of London insurer Kiln Ltd. for £442.2 million in December.

The planned $4.7 billion purchase of Philadelphia Consolidated is the biggest overseas acquisition by a Japanese insurer. Philadelphia Consolidated will double Tokio Marine’s earnings from outside Japan to $575 million, equal to 35 percent of the firm’s total.

“The biggest challenge we face right now is to come up with a growth strategy at a time when the domestic market is stagnating,” Tokio Marine President Shuzo Sumi, 61, said Aug. 4. “Every insurance company in Japan faces the same problem.”

Tokyo-based Dai-ichi Mutual, Japan’s second-biggest life insurer, may be one of the first life insurers to go public. It plans to sell more than ¥1 trillion in shares and convert to a joint-stock company in 2010. Smaller rivals Sumitomo Life Insurance Co. and Meiji Yasuda Life Insurance Co. have said they may follow suit.

“Demutualization is preferable when it comes to expanding your business and raising funds,” said Tatsuo Kurogi, a credit analyst at Standard & Poor’s in Tokyo. “Now is the time to plant the seed in order to survive.”

Dai-ichi on Aug. 8 agreed to pay 376 million Australian dollars ($327 million) to buy 30 percent of Tower Australia to enter the nation’s insurance market, following expansion into Thailand, Taiwan, India and Vietnam.

Nippon Life Insurance Co., Japan’s biggest life insurer, bought 5 percent of Russell Investments of Tacoma, Wash., last month to bolster its asset-management and overseas sales.

Insurers’ expansion plans coupled with declining stock prices may attract investors, said Amit Wadhwaney, a fund manager at New York-based Third Avenue Management LLC, which has about $24 billion in assets globally. The MSCI World Insurance Index has lost more than a fifth of its value in the past year.

“Insurance companies and reinsures have become cheap,” said Wadhwaney, who holds shares of Tokio Marine and Sompo. “I don’t think Tokio Marine’s purchase will be the last one.”