Japan’s life insurance industry is still in terrible shape, according to the latest reports collated by ratings agency Standard & Poor’s. It said the outlook for the industry remains negative after the 2001 results published last week revealed continued business contraction and deteriorating financial strength. The cause: low interest rates and the weak equity market.

“In an attempt to prevent further erosion in creditworthiness, we expect life insurers to continue to cut expenses, reduce the level of risk assets in their investment portfolios, and shift their resources to business areas with greater profit and growth opportunities,” S&P’s said. “However, given their shrinking business in force and the severe domestic investment environment, the near-term benefits from such efforts will be limited.”

The annual results from the 10 largest Japanese life insurers showed a continuing decline in new business and high surrender and lapse rates, which has been blamed on consumer scepticism. Making it worse is the impact of falling share prices and new accounting rules that change the way the companies can handle their investment earnings.

Pointing to high-level mergers as one of the ways out of the long-running crisis, S&P’s said it is possible that such mergers will lead to cost reductions and improved economies of scale. But it added a cautionary note: “We also think it is important to maintain a realistic stance. Most mergers fail to produce the hoped-for synergies.”