Nippon Life Insurance Company

Summary

" ■■ Nippon Life is the largest provider of life insurance in Japan, and at the same time one of the world’s largest insurers in terms of total assets and insurance policies. Its consolidated total revenues amounted to Ґ7,454.1 billion ($62,014 million) in 2003, a decrease of 6.6% from the previous fiscal year.

" ■■ Nippon Life operates key subsidiaries abroad. In the United States, where the company has been present for 20 years, the company owns Nippon Life Insurance Company of America. However, Asian countries are now the key development areas for Nippon Life, where it is expecting high rates of economic growth, as well as counting on the fact that the insurance participation ration is relatively low.

- ■■ One of the key strengths of Nippon Life is its strongly positioned brand name in the Japanese life insurance market, where the company holds a market share of 20%.

" ■■ The greatest opportunities for Nippon Life at the moment include the expansion in Asia and development of new products, at the same time improving the quality of the services.

Overview

Nippon Life, (also know as Nissay) based in Osaka, Japan, is both the largest provider of life insurance in Japan and one of the world's largest insurance companies in terms of total assets and insurance policies. It is one of the Big Three Japanese life insurance companies, which include Dai-Ichi Mutual Life and Sumimoto Life. The company's core business is life insurance, and products and services within this area are made available to both individual and corporate/group clients. Nippon Life also offers non-life products and such cover as medical treatment and long-term care, as well as asset management/asset formation products.

Nippon Life Insurance's consolidated total revenues amounted to Ґ7,454.1 billion ($62,014 million) in 2003, a decrease of 6.6% from the previous fiscal year. Operating income dropped 60.2% from the previous fiscal year to Ґ125.8 billion ($1,138 billion).

The company operates (with its subsidiaries), a central framework for insurance provision, the Nissay Insurance Account. This co-operative platform offers discounts and integration of client's life and non-life policies under one account. A tie-up with Japan Net Bank also allows for online access and manipulation of bank and insurance accounts under the Nissay Insurance Account heading. The company offers corporate risk consulting, facilitated through a co-operative arrangement with subsidiary Nissay Dowa General Insurance Company.

The company operates several alliances with outside companies, particularly in the area of re-insurance where it co-operates with Swiss Reinsurance Company, Munich Reinsurance Company, Cathay Life Insurance Company, Samsung Life Insurance Company and Zurich Life Insurance Company. In the field of asset management, it has alliances with Putnam Investments and Deutsche Bank and part-owns PanAgora Asset Management based in Boston, Massachusetts, United States. Subsidiary, Nissay Dowa General Insurance Company Limited was itself the end result of a co-operative arrangement between Nippon Life and the Dowa Fire and Marine Insurance Company, which developed into a merger between Dowa and Nissay General Insurance.

Nippon Life operates key subsidiaries abroad. In the United States, where the company has been present for 20 years, the company owns Nippon Life Insurance Company of America. NLIA was originally established to provide employee benefit programmes for Japanese companies operating in the United States and now it offers products and services under its own brand. With branches in New York, Los Angeles and Chicago, Nippon Life is the only Japanese insurer in the United States to underwrite group insurance products, such as health insurance, term life insurance and income protection insurance. The company also owns Nippon Life Insurance Company of the Philippines, established in 1997, which it operates as a joint venture with the Yuchengco Group, one of the biggest financial services companies in Philippines. In Thailand, the company acquired a stake in Bangkok Life Assurance Limited in 1997. These subsidiaries abroad primarily focus on the provision of services to Japanese companies, although, as in other areas, diversification is becoming the order of the day, widening the customer base. Asian countries are now the key development areas for Nippon, where the company is expecting high rates of economic growth, as well as counting on the fact that the insurance participation ration is relatively low.

History

The Nippon Life Insurance Company was established as a limited company in Osaka in 1889. The company was later restructured as a mutual company in 1947. In 1991, the company established a U.S. insurance subsidiary, Nippon Life Insurance Company of America (NLIA), to offer products and services under its own brand, to a growing number of Japanese companies operating in the United States.

In February 1997, the company established Nippon Life Insurance Company of the Philippines, Inc. (NLP) as a joint venture with the Yuchengco Group, one of the biggest financial groups in the Philippines. In April of the same year, Nippon acquired a stake in a Thai insurer, Bangkok Life Assurance Limited.

In January 2003, the company announced the establishment of China based, Nissay-SVA Life Insurance Co. Ltd., in a joint financing agreement with SVA (Group) Co. Ltd., a major consumer electronics manufacturer in China.

Two months later, in March 2003, the company introduced Shin Ikiru Chikara EX, which is the first product in the life insurance industry to offer coverage for the reoccurrence of three major illnesses in Japan: cancer, apoplexy and cardiac infarction. The insurance policy provides for long-term medical treatment.

SWOT analysis

Strengths

Maintaining its strong position in the Japanese market: despite the problems the Japanese economy is facing at the moment, namely low interest rates, stagnation and deflation, the company has been able to maintain reasonable growth in the recent years. Nippon Life managed to maintain its strong 20% market share in the Japanese life insurance market.

Strong risk management strategies: the company has a strong direct management strategy and an effective risk management strategy, where the independent risk management unit acts independently from other departments. This adds security to the business and at the same time attracts new investments, especially in view of the regulations regarding the illegal activity in the financial services industry.

Leadership position in Japan: Nippon Life Insurance Company is Japan's largest life insurer and throughout its history the company has developed strong brand awareness and brand loyalty. This strong brand is the key reason why the company has been able to sustain its growth in view of the current economic stagnation in Japan. The fact that the name is well established means that Nippon Life has a greater chance of surviving recessions and related difficult times than many of its competitors.

Weaknesses

Exposure to equity markets: the company is over exposed to the United States and Japan and does not have enough exposure to emerging markets or established markets in Europe. Both the UK and United States are strongly involved in equity markets, which means any gains will be enhanced but so will losses. As is currently evident, the company is fighting difficult economic conditions, and with the current exposure, it cannot transfer or re-direct efforts to different markets. If it wishes to remain competitive within the Japanese market, it needs to look out for more diversification. There are signs that the company is now being more cautious. Nippon Life reported in July 2004 that it is now reducing its exposure to foreign bonds, especially in the U.S. market.

Competitive market: Nippon faces the serious threat posed by other insurers in its domestic market including the major insurance companies such as Sumitomo life insurance Company, Mitsui Life Insurance and Dai-ichi Mutual life Insurance Company, non-life insurers entering the life insurance market and foreign competitors. One of the ways the company can ensure it remains competitive is through greater product innovation. Nippon Life has been taking steps in this direction, and in August 2004 Nihon Keizai Shimbun announced that Nippon Life Insurance would be the first in Japan to administer the new, 401(k) style defined contribution pension programmes.

Problems with solvency margin ratio: although still well above the threshold by which the government would ask the company to take corrective steps, the fact that the company experiences a decrease in the number of individual life and annuity contracts, is worrying for the business.

Opportunities

Continue its expansion in Asia: despite having a relatively broad geographic spread of offices, Nippon is lacking sufficient exposure in the East Asian region. The primary reason to target the Asian market is the high rate of economic growth expected in the region and the low insurance participation ratio. Growth is expected in the medium to long term and the company has already established a position in a number of markets, including Thailand, Philippines and China.

Deregulation in financial services: the company can now diversify its product offering, and recently expanded it by adding nursing and medical services and pension plans.

Acquire to enter new markets: the company should seek to expand through acquiring or merging with another firm, particularly if the firm is established in a market Nippon wishes to break into, similarly to how it entered the Thai market (through Bangkok Life Assurance Limited). New acquisitions worldwide will mean that the company would be less dependent on the troubled Japanese market.

Launch new products and improve services: in order to remain competitive, Nippon must continue to produce more efficient and consumer friendly products, and offer reasonable returns, especially on products such as pensions. A move in this direction was apparent in March 2003 with the creation of indemnity insurance for the reoccurrence and treatment of the three major illnesses, something that has not yet been released in Japan. The company is renowned for the door-to-door approach, yet has not developed strong client skills. In order to attract more customers, it has introduced new distribution channels, including the Internet and telesales.

Threats

Deflation, low interest rates and drop in share prices: this is one of the major problems for Nippon, and for the whole of the Japanese insurance industry. The market is still depressed, and this is an ongoing threat. The market has been underperforming for the past five years.

Risky investment decisions: considering the volatile economic environment, the company is adopting a quite risky position in terms of asset management. The company has decided to invest in alternative funds and private equity funds, with the intention of generating higher returns over the long term. This, however, given the economic circumstances led to the total assets decrease by 15.8% to Ґ5,598 billion in 2003 ($50,660 billion).

Company activity snapshot

- ■■ On the August 19, 2004 it was announced that Nippon Life has become the first in Japan to manage more than 100 401(k) defined-contribution pension programs. The number of approved plans under its management has risen by 15% from 88 at the end of March 2004 to 102 as of the end of July 2004. Since the increase came from a range of businesses employing between 100 and several thousands, the aggregate number of workers whose defined-contribution pension plans were overseen by Nippon Life rose to an estimated 110,000 as of July 31, 2004. This means that considering the difficult economic circumstances that Japan is facing at the moment, Nippon Life is trying to expand its product offering, aware of the increasingly competitive market and the fact that pensions are one of its potential gold mines of the future;

" ■■ the combined number of salespersons at Japan's nine major life insurers, including Nippon Life Insurance Co. and Dai-ichi Mutual Life Insurance Co., stood at 234,000 at the end of March 31, 2004, a decrease of 6.5% from a year ago, posting the thirteenth consecutive year of decline since the March-end of 1991. The combined number, which has declined to about 60% of the peak in the bubble economic period, marked the second-biggest fall since the 7.5% decline in fiscal 1997 when Nissan Mutual Life Insurance Co. went bankrupt. The trend reflects the fact that consumers now have more options for buying policies, including mail-order marketing by foreign life insurers. It also suggests that management approaches traditionally adopted by domestic life insurers, which mobilise a large number of sales staff, have come to a turning point, industry sources commented. This drop in salespersons comes around the same time when Nippon Life has started to expand other distribution channels, namely the Internet and telesales;

" ■■ the top nine life insurers saw their aggregate paper losses on property holdings jump by 23% to Ґ661.2 billion in fiscal 2003 as land prices continued to decline almost everywhere in Japan. The increase marked the third consecutive year of mounting losses on real estate. Paper losses ballooned at six life insurers, including Nippon Life Insurance Co., Dai-ichi Mutual Life Insurance Co., Sumitomo Life Insurance Co. and Asahi Mutual Life Insurance Co. Fukoku Mutual Life Insurance Co. was the only insurer that saw a paper profit on properties. According to government appraisals as of January 1, 2004 land prices in commercial districts in central Tokyo generally have stopped falling. However, prices in other areas of Japan dropped 6.5% year on year, faster than the previous year. Since life insurers own rental office buildings nationwide, with many located in commercial areas, declining land prices in various regions significantly depressed their values;

- ■■ life insurers' finances improved significantly in fiscal 2003 due to the sharp rise in share prices. Their shareholdings had paper profits of five trillion yen as of the end of March 2004 compared with paper losses of Ґ360 billion a year earlier. Since life insurers will likely have to book around half of their paper losses on real estate as impairment charges, any shortfalls from the accounting could weigh down their earnings when asset impairment standards become mandatory in fiscal 2005;

" ■■ Nippon Life Insurance announced that its solvency margin ratio, a key gauge of an insurer's ability to pay policyholders, stood at 893.8% as of March 31, 2004 rising from 630.6% a year earlier on the stock market recovery. Although the closely watched gauge is well above the 200% threshold below which the government requires insurers to take prompt corrective measures, Nippon Life saw its balance of individual life and annuity contracts continue to fall in fiscal 2003;

" ■■ in its earnings report for the year ended March 31, 2004 the largest Japanese life insurer said that life insurance and annuity contracts newly signed with individuals dropped 22.9% from the previous year to Ґ19,468.19 billion. The outstanding balance of such contracts came to Ґ278,320.53 billion as of March 31, 2004 down 5.6% from a year before. Nippon Life said it had Ґ2,631.12 billion in unrealised profits on its shareholdings as of March 31, 2004 sharply up from the Ґ669.0 billion a year earlier, as a result of a nearly 50% jump in Tokyo stock prices over the year;

- ■■ life insurers are major institutional investors and fluctuations in share prices affect their financial health. Nippon Life said it still had about Ґ290 billion in negative spread between guaranteed returns to policyholders and much lower investment returns on assets in fiscal 2003, although the amount was down from the Ґ320 billion the previous year. Life insurers have been suffering from negative spreads amid sluggish financial margins, undermining their core profits. Nippon Life said its core operating profit, a key gauge of an insurer's profitability, amounted to Ґ559.86 billion in the reporting year, up 2.7% from the previous year.