Fitch: Limited Impact on Japanese Life Insurers from Valuation Interest Rate Cut

(The following statement was released by the rating agency) HONG KONG, March 12 (Fitch) Fitch Ratings says Japan's upcoming cut to the valuation interest rate on new business volumes will have limited impact on the profitability of Japanese life insurers over the short-term. This is because most Japanese life insurers have increased their new business premium charges to mitigate the corresponding increase in life actuarial reserves as a result of this impending rate cut. In general, lower valuation interest rates will result in an upward surge in the amount of life actuarial reserves required as life insurers underwrite new businesses into their portfolio. Japan's Financial Service Agency recently announced its plan to lower the standard valuation interest rate to 1% from 1.5% on all new business volumes underwritten from 1 April 2013. The rate is used to calculate the amount of policy reserves required for life insurers to meet their future insurance liabilities. This change will not affect the valuation basis of Japanese life insurers' existing in-force policies. In anticipation of the lower guaranteed interest rate, Japanese life insurers have announced increases in the premiums of saving-type products which generally require higher reserves than protection-type products. This is likely to cause a decline in the sales of JPY- denominated saving-type products which are mainly distributed through bank channels. However, the impact on Japanese life insurers' overall profitably is likely to be small given the low profit margin of these saving-type products. At the same time, some life insurers are using the valuation rate cut as an opportunity to rebalance the demographic mix within their portfolio of core packaged products (namely whole-life products with riders). This will strengthen the sustainability of their future business volume. For example, they announced higher premiums for the elderly and slightly lower premiums for younger customers. Over the medium-term the impact on profitability will depend on how each insurer's pricing strategy on core products plays out. Traditional life insurers may suffer if price competition intensifies, placing pressure on targeted profitability. However, insurers may benefit if they successfully expand their outreach to younger generations which provide more sustainable demand in the medium- to long-term. Contact: Akane Nishizaki Associate Director +852 2263 9942 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Teruki Morinaga Director +81 3 3288 2781 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.