Tokyo: Standard & Poor's (S&P) ratings services has said that Japanese life insurance companies' policies governing their exposure to the major banks are gradually diverging.

Although overall exposure risks remain high, some companies have become more aware of the risks, while some others remain stuck in traditional relationships. In one of its earlier reports S&P had warned about Japan's largest life insurers have huge exposure to the major banks.

The rating agency recently requested updated exposure figures from rated insurers, which confirmed greater awareness of risks in this exposure among some insurers. Holdings of bank common stock dropped sharply by 53 per cent-86 per cent at most of the 10 major life insurance companies during fiscal 2002 (ended March 2003).

While the reduction was largely due to the plunge in the banks' share prices, part of the reduction can be attributed to outright sales, as a few insurers have unwound part of their ownership interests in some of the major banks.

The private offering of JPY1 trillion in preferred stock by Mizuho Holdings in March 2003 gathered significant market attention. Dai-ichi Life Insurance, Yasuda Mutual Life Insurance, Fukoku Mutual Life Insurance, and Meiji Life Insurance underwrote a total of JPY106 billion of the offering.

However, the amount underwritten by insurers turned out to be relatively small compared to the major life insurers' existing exposure to major banks' common stock, which stood at JPY1.9 trillion at March 31,2002 according to S&P's previous survey.

Other insurers, such as Nippon Life Insurance-Mizuho's second-largest shareholder as of 31 March 2002 excluding trust banks as custodians-did not appear on the list of major underwriters disclosed by Mizuho Holdings.

Another area of change is the decrease in the major life insurers' exposure to banks through subordinated loans, which stood at JPY3.5 trillion at March 2002. During fiscal 2002, this exposure decreased at most of the 10 major insurers, although the rate of reduction varied between them.

Several insurers cut exposure by more than 40 per cent, whereas others were less aggressive.

Following discussions with rated life insurance companies, S&P has recognised a divergence between life insurers' policies on their relationships with the major banks. Some life insurers are ready to shift their strategic focus to minimising risks in their exposure to the banking sector, and away from maintaining their historical relationships with banks.

In the past several years, insurers have suffered significant losses in their investments in the banking sector and it is widely recognised by both management and the public that these investments have been a source of vulnerability for Japanese insurers. In this regard, there are signs of change in the risk culture of some life insurers, although these changes will be probably only be gradual.

In S&P's view, the reduction of investment risk would more than offset any possible negative impact on insurers' ability to sell products through banks, and thus be a positive factor for the ratings on insurers in general.

Trends in insurers' exposure to the banks are no longer uniform across the industry. Some insurers appear stuck in their reliance on banks with which they have historically close relationships.

In particular, insurers that rely on financial support from such banks are less likely to sell the banks' common or preferred stock, although their total exposure may decrease as insurers' subordinated loans to banks mature. As a result, risks in capital cross-holdings will remain high in some parts of the financial sector.