Fitch: Dai-ichi Life Acquisition Won't Hurt Sales Force Profitability

Mon Feb 17, 2014 7:01pm EST

(The following statement was released by the rating agency) TOKYO/HONG KONG, February 17 (Fitch) Fitch Ratings expects The Dai-ichi Life Insurance Company, Limited (Dai-ichi Life, IFS A+/Stable) to be able to maintain good profitability in its core sales force even after it acquires smaller, low-cost insurer Sompo Japan DIY Life Insurance Co., Ltd (Sompo Japan DIY). The acquisition of Sompo Japan DIY will allow Dai-ichi Life to diversify and enlarge its customer base over the medium term, but an important risk is whether the traditional Japanese life insurer will be able to avoid any premium price erosion in its core sales force after its integrating Sompo Japan DIY. The worst possible scenario is that Dai-ichi Life makes unnecessary premium rate cuts in the products sold by its core sales force. Fitch believes Dai-ichi Life is likely to maintain profitability in the core sales force by separating the low-cost operating entity adequately. Dai-ichi Life already owns 10% of Sompo Japan DIY due to its strategic alliance with the smaller insurer's parent, Sompo Japan Insurance, Inc. (Sompo Japan, IFS A+/Stable), and will purchase the remaining 90% from Sompo Japan in the latest deal. The purchase price is around JPY5bn, which is negligible compared with Dai-ichi Life's net assets of JPY1,971bn at end-December 2013. Dai-ichi Life's customer base has been built up largely through its own sales force, which attracts conservative customers who are less sensitive to premium rates and prefer consulting with sales people. By acquiring Sompo Japan DIY, Dai-ichi Life will be able to tap proactive and price-sensitive customers who shop around for products. Non-traditional life insurers, including foreign companies such as Aflac, Inc. (IFS AA-/Stable) and subsidiaries of non-life insurance groups such as NKSJ Himawari Life Insurance Co., Limited, have demonstrated their strength in this market segment with their relatively simpler and cheaper products. Dai-ichi Life is planning to use Sompo Japan DIY as its low-cost operating entity that will provide cheaper and simpler products compared with the products that its core sales force promotes. Dai-ichi Life will start distributing new products via Sompo Japan DIY's agents from 2H15, with the latter expected to change its name by then. Fitch expects Dai-ichi Life's overall credit fundamentals to continue to improve for now. This is due to: improving investment spread; resilient life insurance underwriting backed by a steadily growing profitable third (health) sector; and continued reduction of interest rate risk as the company reduces the duration gap between assets and liabilities. Contacts: Teruki Morinaga Director +813 3288 2772 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F, 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Akane Nishizaki Associate Director +852 2263 9942 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at 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.

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