3 nonlife insurers discussing merger

Battered by the global financial crisis, three nonlife insurers are negotiating a merger that would create the leader in the shrinking domestic market, sources said.

Executives at Mitsui Sumitomo Insurance Group Holdings Inc., Aioi Insurance Co. and Nissay Dowa General Insurance Co. hope to reach a basic agreement by the end of March, the sources said.

The talks are focused mainly on streamlining operations and other measures needed for survival as the nonlife insurance industry in Japan takes a hit from all sides.

Returns on asset management, a key source of earnings for institutional investors such as insurers, have plummeted amid the current financial turmoil.

The domestic market for casualty insurance, such as car and fire insurance, has been shrinking due to the falling birthrate and the aging population.

Auto insurance, which accounts for about half of the industry's premium revenue, has suffered from plunging vehicle sales and escalating discounts.

Fire insurance, meanwhile, offers little room for growth.

According to the General Insurance Association of Japan, the combined pretax profits at 26 member companies fell 57.3 percent from a year earlier to 107.8 billion yen during the six months through September.

The proposed merger, if it goes through, would open a second chapter in realignment among domestic nonlife insurers.

In the first round, triggered by liberalization in premiums in 1998, 14 listed nonlife insurers were consolidated into seven.

Mitsui Sumitomo Insurance, the second-largest player in premium revenue, Aioi Insurance, ranked fourth, and Nissay Dowa Insurance, sixth, were all born through mergers in 2001.

The three companies together collect about 2.7 trillion yen in premium revenue on a consolidated basis, exceeding the figure for top-ranked Tokio Marine Holdings Inc.

The companies are expected to bolster their competitiveness by capitalizing on the expanded customer base and increasing efficiency among their administrative systems.

Aioi Insurance's advantage in the auto insurance segment lies in its close ties with Toyota Motor Corp., its top shareholder with a 33.4-percent stake.

With the domestic market shrinking, top companies such as Tokio Marine and Mitsui Sumitomo Insurance expanded their operations in Asia and elsewhere to seek new revenue sources.

In the April-September period, however, profits plummeted at these aggressive companies amid the global financial instability.

"The whole industry has sunk deep into the structural slump as we cannot make money either at home or abroad," said a senior official at a major nonlife insurer.

The first wave of consolidation in the early 2000s did not end speculation of further realignment partly because the industry is crowded with more players than the banking and other financial sectors.

If the three companies agree to integrate their operations, pressure is expected to grow on third-ranked Sompo Japan Insurance Inc., fifth-ranked Nipponkoa Insurance Co. or even Tokio Marine to seek partners to stay competitive.

Analysts said future realignment could involve companies in other financial sectors, such as life insurance and banking.(IHT/Asahi: December 30,2008)