S&P Warns Proposed Cuts In Guaranteed Japanese Life Yields Would Be Defaults

By Staff Writer

August 23, 2001 at 08:00 PM

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NU Online News Service, Aug. 23, 3:35 p.m. – Standard & Poor's, Tokyo, warns it will view any move by a life insurer in Japan to reduce its guaranteed yield payments to policyholders as a default on its contractual obligations.

The Japanese government is considering a proposal to allow Japanese life insurers to reduce guaranteed yields promised to policyholders.

"Standard & Poor's would immediately place the financial strength and counter-party ratings of any life insurer that announces it is contemplating a reduction of its guaranteed yield on CreditWatch with negative implications," S&P writes in a response to the proposal.

The rating agency may change the life insurer's counter-party rating to "SD," or Selective Default, on the date the new lower yield becomes effective, reflecting the default on the guaranteed yield policies, S&P says.

S&P may also change the rating to "D," or default, if other classes of creditors are affected by the restructuring and the life insurer effectively defaults on, or restructures, other types of financial obligations.

Because of the Japanese government's low interest policy, most Japanese life insurance companies are now paying higher yields to their policyholders than they can safely earn in the financial markets. This in turn is widening losses on investments.

The negative spreads, together with poor investment performance and a bearish stock market, pushed five life insurance companies into insolvency last year, according to S&P.

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