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Life Health > Life Insurance

S&P Blasts Japan Guarantee Reduction Proposal

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NU Online News Service, Nov. 25, 10:05 a.m. – Japanese officials are talking seriously about the possibility of helping the company’s troubled life insurers by giving them permission to reduce their guaranteed yield payments to policyholders.

But insurance analysts at Standard & Poor’s, New York, say they would view any reduction in a company’s guaranteed payments as a default on the company’s contractual obligations.

“As such, Standard & Poor’s would immediately place the financial strength and counterparty ratings of any life insurer that announces it is contemplating a reduction of its guaranteed yield on CreditWatch with negative implications,” S&P says in a statement about the proposed wave of reductions. “If the insurer’s plans were confirmed, Standard & Poor’s would downgrade the company’s financial strength and counterparty ratings to ‘CCC’ or below. Eventually, the life insurer’s counterparty rating would be changed to ‘SD’ (selective default) on the date the new lower yield became effective, reflecting the default on the guaranteed yield policies, or possibly to ‘D’ (default) if other classes of creditors were also affected by the restructuring and the life insurer effectively defaulted on, or restructured, other types of financial obligations.”

Japanese life insurers promised the yields at a time when the yields seemed very low, but now that the country has been in a prolonged economic slump, the insurers seem to have no safe way to earn enough income on assets to cover the cost of the guaranteed yield obligations.

Despite the fact that the insurers are facing negative investment spreads, “it should be noted that most are still posting positive core profits, offsetting investment losses with other profits (namely mortality profits and expense profits),” S&P says.

Because most Japanese life insurers are still profitable, S&P doubts many would actually reduce their guaranteed yield payments, the company says.


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