Japan insurers Sompo, NipponKoa to merge: source

By Reiji Murai and Yumiko Nishitani

TOKYO (Reuters) - Japanese non-life insurers Sompo Japan Insurance (8755.T) and NipponKoa Insurance (8754.T) plan to merge, an industry source said, in the second deal in less than two months in a sector struggling with slumping demand and a dwindling, aging population.

Japan's non-life insurance industry is under pressure as car and housing insurance sales slide and the population falls, prompting rivals to join forces to cut costs.

The merger of the two would create a company with premium income of over 2 trillion yen ($20.7 billion), putting it third in the Japanese non-life insurance industry with a market share of more than a quarter.

Shares in Sompo, the country's current No. 3 non-life insurer which has been losing money, rose 2.6 percent, while those of fifth-ranked NipponKoa, which is profitable, tumbled 10.1 percent. They would have a combined market value of about $10 billion.

"The merger report is not something that investors particularly liked," said Fumiyuki Nakanishi, manager at SMBC Friend Securities.

"The deal is aimed at survival in a shrinking market, as opposed to forward-looking mergers and acquisitions such as those taking place overseas or in growth areas."

Japan's non-life insurance market, which was worth about 7.5 trillion yen in the year to March 2008, has been stuck in decline, hit especially hard by falling car sales.

In the past, insurers were able to make up for losses in their core insurance operations with their investment returns.

But the global financial mess has ended that.

Japan's top seven non-life insurers plunged to a combined loss of 20 billion yen in the nine months to December from a profit of 270 billion yen in the same period a year earlier, according to the Nikkei business daily.

Sompo Japan, which has been strong in car and fire insurance, suffered a net loss of 594 million yen in April-December, while NipponKoa, which has strong sales through regional banks, made a net 20 billion yen. Revenue shrank at both firms.

"We believe that scale is the key driver of this deal," said Makarim Salman, analyst at Macquarie Capital Securities in Tokyo.

"The larger clout should also allow the insurer to compete more effectively internationally -- an important strategy given Japan's changing demographics."

Mizuho Securities analyst Koichi Niwa said the challenge for Sompo and NipponKoa as well as their rivals would be how they spend the money they save from merging.

"One possibility is expanding into the life insurance area and another is overseas, especially in Asia," he said about the media reports on the deal.