XE.com - TEXT-S&P summary: Hitachi Capital Insurance Corp.

(The following statement was released by the rating agency)

May 28 -

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Summary analysis -- Hitachi Capital Insurance Corp. --------------- 28-May-2012

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CREDIT RATING: None. Please see issue list. Country: Japan

Primary SIC: Fire, marine, and

casualty

insurance

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Financial Strength Rating History:

29-Sep-2004 A-

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Rationale

The rating on Hitachi Capital Insurance Corp. (Hitachi Capital Insurance; A-/Stable/--) reflects explicit support from its parent company Hitachi Capital Corp. (Hitachi Capital; A-/Stable/A-2) in the form of guarantees on claim payments. Standard & Poor's Ratings Services believes that Hitachi Capital Insurance is a strategically important subsidiary of Hitachi Capital Corp. The parent company says it aims to establish a new revenue base by developing 'function-oriented businesses.' Hitachi Capital Corp. is shifting from generating sales through creating products to businesses that provide various functions, including credit insurance. Therefore, we believe the importance of its credit insurance business is growing. The parent company positions credit insurance as one of the new businesses that will allow Hitachi Capital Insurance to utilize its technological know-how and expertise in the leasing and credit businesses to expand in the area.

Hitachi Capital Insurance, on a stand-alone basis, has high-quality investment assets and strong capitalization. Hitachi Capital Insurance intends to enhance its niche market positions by leveraging its connections through the Hitachi group. However, the company's business franchise is limited to the Japanese non-life insurance market, which Standard & Poor's views as a weakness.

Hitachi Capital Insurance is the successor of the former Unum Japan Accident Insurance Co. Ltd. (Unum Japan), which was established by U.S.-based UnumProvident Corp. (UnumProvident; not rated) in 1994. Hitachi Capital, a major Japan-based leasing company within the Hitachi group, purchased the company in January 2004 and renamed it on April 1, 2004. Hitachi Capital has 79.4% ownership of the insurer and Sompo Japan Insurance Inc. (A+/Stable/--) has 20.6%. Sompo Japan supports Hitachi Capital Insurance by performing a range of business functions, including human resources, administration regarding notifications of claims from policyholders, and claims-handling services.

The company's main businesses had traditionally been long-term disability (LTD) insurance, which was inherited from Unum Japan, and fire insurance for housing loan borrowers. Following the insurer's review of its business structure in fiscal 2007 (ended March 31, 2008), credit insurance replaced fire insurance as the second pillar of the company's business after LTD insurance.

The company puts a higher weighting on safety and liquidity in investment assets, which account for 95.8% of its total assets and are mostly invested in deposits, Japanese government bonds, and highly rated corporate bonds. As such, the quality of its investment assets is high. The company's capitalization is solid, in light of risks relating to insurance policies and its investment assets; it had received a capital injection of JPY3.2 billion from its parent Hitachi Capital Corp in fiscal 2007. The company is likely to receive financial support from the parent when needed.

In fiscal 2010 (ended March 31, 2011), Hitachi Capital Insurance's net written premiums decreased by 0.5% from the previous fiscal year to JPY3.62 billion. Revenues from LTD increased, while credit insurance revenues decreased. Accordingly, LTD accounted for approximately 70% of net written premiums while credit insurance accounted for the remaining 30%. The insurer's loss ratio on a written base improved by 2.3 percentage points from the previous fiscal year to 38.5%, mainly due to lower loss payments on major credit insurance claims. Meanwhile, its expense ratio deteriorated by 0.8 percentage point to 43.8%. Accordingly, the insurer maintained its combined ratio at a favorable level at 82.3%. The company posted net losses for three consecutive years until fiscal 2007, but turned profitable from fiscal 2008 (ended March 31, 2009) after its business restructuring. In fiscal 2011 (ending March 31, 2012), due to its business' limited exposure to natural catastrophes, such as the Great East Japan Earthquake and the stable growth of LTD, we expect the company to maintain a net profit.

As for LTD, significant growth in insurance premiums paid by large organizations, such as corporations, is unlikely amid the current slow recovery in the Japanese economy. In addition, sales of LTD products to individual policyholders have become more competitive. Hitachi Capital Insurance has been reviewing insurance contracts with high loss ratios and strengthening its underwriting operations since fiscal 2007 to improve the profitability of its LTD business. These efforts have already proven effective to a certain degree. Hitachi Capital Insurance will be challenged to increase revenues from its two core businesses and bolster its risk management system, and raise revenues from the insurance business in a stable manner.

Standard & Poor's evaluates Hitachi Capital Insurance's Enterprise Risk Management as Adequate, as we see no material flaws in its management of the various risks that it undertakes.

Outlook

Given the explicit guarantee from Hitachi Capital Corp., the stable outlook on Hitachi Capital Insurance mirrors that on the parent. Any changes in the parent's ratings or outlook will be reflected in the rating on the insurer. We may also downgrade Hitachi Capital Insurance if there are any changes in terms of explicit support from Hitachi Capital, which is currently given in the form of guarantees, or if its status as a strategically important entity within the group changes.

(Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net)

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