The merger announced Friday by nonlife insurers Sompo Japan Insurance Inc. and Nipponkoa Insurance Co. comes at a time when slumping car and house sales and the global financial crisis are squeezing the industry for profits, analysts said.

Sompo, Japan’s third-largest nonlife insurer, and Nipponkoa, the fifth-largest, said in a statement that they would integrate under a holding company in 2010, creating a behemoth with ¥1.09 trillion in combined net assets.

Insurers hope the 2010 integration will strengthen their finances and allow them to take more aggressive measures to expand.

In January, Mitsui Sumitomo Insurance Group Holdings Inc., Aioi Insurance Co. and Nissay Dowa General Insurance Co. announced plans to merge into Japan’s largest nonlife insurance group.

Minoru Hattori, an analyst at Okasan Securities Co., said Nipponkoa and Sompo are fighting to survive against their bigger rivals — Tokio Marine Holdings Inc. and the Mitsui-Aioi-Nissay giant.

“That is why Nipponkoa and Sompo decided to merge and turn themselves into one of the mega-insurers,” Hattori said.

The Sompo Japan-Nipponkoa alliance will be the third-largest insurance group after Tokio Marine Holdings Inc.

U.S. investment advisory firm Southeastern Asset Management Inc., the top shareholder in both Sompo Japan and Nipponkoa, had been asking Nipponkoa to merge with its rival.

The integration will leave the Tokyo-based insurance giants aligned with the nation’s megabanks, Hattori said, noting Sompo’s ties with Mizuho Financial Group Inc.

He also said Sompo will help by making use of its partnership with Dai-ichi Mutual Life Insurance Co., while Nipponkoa will contribute with its strong regional banking ties.

He also suggested the two could benefit from streamlining their businesses.

But pitfalls remain, Hattori said.

Although nonlife insurers get more than half of their premium revenues from auto insurance, the number of drivers is on the decline. They are also leaning toward smaller cars, which means less revenue, he said.

Hattori expects the three insurance giants to intensify their service and price competition, which will benefit consumers.

Shun Tanaka, chief analyst at SMBC Friend Research Center Ltd., agreed.

“There is less room for the domestic nonlife insurers to grow,” Tanaka said, noting the global economic crisis has put the brakes on car and house sales and caused insurers’ other assets to depreciate.

Since the domestic nonlife insurance market is constrained by shrinking demand, Tanaka predicted they would have two choices: Join hands with life insurers or launch overseas operations.

Tanaka suggested that prospects for the overseas option were rather dim because most developed economies are in a dire state anyway.

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