S&P: Outlook Negative on 9 Japanese P/C Insurers; Ratings Affirmed

March 25, 2011

Standard & Poor’s Ratings Services has conducted a detailed analysis of 15 Japanese P/C insurers, and has made several adjustments in its ratings following the earthquake and tsunami, which hit the country on March 11.

S&P has revised the outlooks on the long-term counterparty and financial strength ratings on the following companies: Mitsui Sumitomo Insurance Co. Ltd.; Aioi Nissay Dowa Insurance Co. Ltd.; Mitsui Sumitomo Kirameki Life Insurance Co. Ltd.; Mitsui Sumitomo MetLife Insurance Co. Ltd.; Sompo Japan Insurance Inc.; NIPPONKOA Insurance Co. Ltd.; Sompo Japan Himawari Life Insurance Co. Ltd.; Kyoei Fire & Marine Insurance Co.; and Secom General Insurance Co. Ltd. However, S&P has affirmed its ratings on all of these companies.

The outlook revisions “are based on our view that the catastrophic earthquake that struck northeastern Japan on March 11, 2011, is likely to negatively affect the financial bases of the aforementioned insurers,” S&P explained. “We carried out the outlook revisions after examining the impact of the earthquake on each insurer separately, following our outlook revision of the Japanese non-life insurance sector to negative from stable on March 15, 2011 (for details, please see “S&P Revises Its Outlook On The Japanese Non-Life Insurance Sector To Negative From Stable After Powerful Earthquake,” published March 15, 2011).”

S&P also said it has affirmed its ratings on six insurers and maintained the outlooks at stable. They are: Tokio Marine & Nichido Fire Insurance Co. Ltd.; Tokio Marine & Nichido Life Insurance Co. Ltd.; Nisshin Fire & Marine Insurance Co. Ltd.; ACE Insurance; Allianz Fire and Marine Insurance Japan Ltd.; and Toa Reinsurance Co.

S&P has calculated that the total amount of the claims to be paid on earthquake insurance policies relating to the massive earthquake will “exceed those relating to the Great Hanshin earthquake that struck Kobe in western Japan in 1995. According to some media reports, claim payments may reach nearly ¥1 trillion [$12.329 billion].”

The rating agency added that, although it “expects non-life insurers to cover their claim payments on earthquake insurance and other lines for earthquake risk by drawing down their earthquake contingency and catastrophe reserves, we hold the view that claim payments are likely to adversely affect insurers’ net incomes. At the same time, we believe that insurers will be affected by drawdown of reserves and fall in value of their domestic equity holdings, which would reduce their capital.”

S&P’s analysis of the impact of the earthquake on the capitalization of rated non-life insurance companies and groups under a stress scenario, assuming total claim payments on earthquake insurance for residential properties, arrived at the approximately ¥1 trillion figure. It also took into account “payment of claims on earthquake fire expense insurance and extended earthquake coverage for commercial and industrial risks. As a result of the analysis, we revised our outlooks on insurance companies and groups that may see declines in their estimated capitalization levels to below levels commensurate with the current ratings.”

The bulletin also noted that S&P’s current expectation is that the “total claim payments on earthquake insurance for residential properties will be below ¥1 trillion. However, if the total claim payments exceed our expectations, we may consider downgrading the companies that have undergone negative outlook revisions.

“In such cases, we expect any downgrade to be within one notch. On the other hand, we may revise the outlooks back to stable, if total claim payments on earthquake insurance for residential properties fall far below ¥1 trillion, and if insured losses, including claim payments on earthquake fire expense insurance and extended earthquake coverage for commercial and industrial risks, affect the insurers’ financial bases only in a limited way.

“In addition to the effects of claim payments, we will reflect various factors into the ratings, including recoveries from reinsurance and draw downs of reserves, reinsurance costs, risk reduction efforts, capital management strategies, and the effects of the earthquake on the Japanese economy and stock market.”

As far as analyzing the individual companies’ claims exposure, S&P said that it believes “Tokio Marine Nichido Fire and other companies of the Tokio Marine group will face pressure on their capital and earnings due to payments for earthquake insurance claims.” However, S&P added that it in its view the “credit quality of the Tokio Marine group’s core subsidiaries, which we assess according to our group rating methodology, will continue to exceed the level commensurate with the sovereign rating on Japan (AA-/Stable/A-1+).

“As such, we continue to equalize the ratings and outlooks on Tokio Marine Nichido Fire and Tokio Marine Nichido Life with those on the Japan sovereign, subject to the constraints of the sovereign rating.

“Regarding Nisshin Fire & Marine, which Standard & Poor’s views as a strategically important subsidiary of the group, we expect the company to be able to maintain its capital at a level that is commensurate with the current rating, even after taking into consideration the drawdown of contingency reserves for earthquake insurance against insured losses that the company would incur.”

S&P expects Toa Re “to be able to withstand possible downward pressure from insured losses and stock market volatility, as the company maintains its capital at a very high level relative to its assumed risks.

“Regarding ACE Insurance, its insured losses are likely to have limited impact on the current ratings, given the company’s strong capitalization supported by reinsurance programs provided by the group.

“As for Allianz Fire and Marine, we are maintaining our view that the rating and outlook on the insurer are dependent on the company’s status as a core subsidiary of Germany-based Allianz Group, although they are subject to the constraints of the sovereign rating on Japan.”

As far as Fuji Fire & Marine Insurance Co. (A-/Stable/–) is concerned S&P said it expects the company “to face downward pressure, based on our stress scenario for claim payments on earthquake insurance. Nevertheless, if the Chartis group’s planned acquisition of all of Fuji Fire’s outstanding shares proceeds as scheduled, it may positively affect our assessment of the company in terms of its status in the group (for details, please see “Chartis Group’s Plan To Fully Acquire Fuji Fire May Enhance The Japanese Insurer’s Credit Quality,” published Feb. 15, 2011). Chartis is the non-life insurance unit of American International Group (AIG), and the current ratings on Chartis’ core operating subsidiaries are ‘A’ with stable outlook.” S&P added that it “intends to examine its rating on Fuji Fire after evaluating the strategic importance of Fuji Fire to the group after the acquisition.”

S&P summarized the ratings affected as follows:
Ratings Affirmed:
ACE Insurance – Counterparty Credit Rating Local Currency A/Stable/–; Financial Strength Rating Local Currency A/Stable/–

Allianz Fire and Marine Insurance Japan Ltd. – Counterparty Credit Rating Local Currency AA-/Stable/–; Financial Strength Rating Local Currency AA-/Stable/–

Mitsui Sumitomo Insurance Co. Ltd. – Senior Unsecured AA-, Commercial Paper A-1+

Nisshin Fire & Marine Insurance Co. Ltd. – Counterparty Credit Rating Local Currency A+/Stable/–; Financial Strength Rating Local Currency A+/Stable/–

Sompo Japan Insurance Inc. – Financial Enhancement Rating Local Currency AA-/–/–

Sompo Japan Insurance Inc. – Subordinated A

Toa Reinsurance Co. – Counterparty Credit Rating Local Currency A+/Stable/–; Financial Strength Rating Local Currency A+/Stable/–

Tokio Marine & Nichido Fire Insurance Co. Ltd.; Tokio Marine & Nichido Fire Insurance Co. Ltd. (New Zealand Branch); Tokio Marine & Nichido Fire Insurance Co. Ltd. (U.S. Branch); Tokio Marine Europe Insurance Ltd.; Tokio Marine Global Re Ltd.; Tokio Millennium Re (UK) Ltd.; Tokio Marine Retakaful Pte. Ltd. – Financial Strength Rating Local Currency AA-/Stable/–

Tokio Marine & Nichido Life Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA-/Stable/–; Financial Strength Rating Local Currency AA-/Stable/–

Tokio Marine & Nichido Fire Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA-/Stable/A-1+; Senior Unsecured AA-; Commercial Paper A-1+

Ratings Affirmed; Outlook Revised [from stable to negative]

Aioi Nissay Dowa Insurance Co. Ltd.; Aioi Nissay Dowa Insurance Co of Europe – Financial Strength Rating Local Currency AA-/Negative/– AA-/Stable/–

Aioi Nissay Dowa Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA- Negative/A-1+ AA-/Stable/A-1+

Kyoei Fire & Marine Insurance Co. – Counterparty Credit Rating Local Currency A-/Negative/– A-/Stable/–; Financial Strength Rating Local Currency A-/Negative/– A-/Stable/–

Mitsui Sumitomo Insurance Co. Ltd.; Mitsui Sumitomo Insurance Co. Ltd. (New Zealand Branch); Mitsui Sumitomo Kirameki Life Insurance Co. Ltd.; Mitsui Sumitomo MetLife Insurance Co. Ltd.; Mitsui Sumitomo Insurance (London) Ltd.; Mitsui Sumitomo Insurance Co. (Europe) Ltd.; Mitsui Sumitomo Reinsurance Ltd.; MS Frontier Reinsurance Ltd.; MSI Corporate Capital Ltd.; MSIG Insurance (Singapore) Pte. Ltd.; MSIG Insurance (Hong Kong) Ltd. – Financial Strength Rating Local Currency AA-/Negative/– AA-/Stable/–

Mitsui Sumitomo Kirameki Life Insurance Co. Ltd.; Mitsui Sumitomo MetLife Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA-/Negative/– AA-/Stable/–

Mitsui Sumitomo Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA-/Negative/A-1+ AA-/Stable/A-1+

NIPPONKOA Insurance Co. Ltd.; NIPPONKOA Insurance Co. Ltd. (U.S. branch); NIPPONKOA Insurance Co. (Europe) Ltd. – Financial Strength Rating Local Currency AA-/Negative/– AA-/Stable/–

NIPPONKOA Insurance Co. Ltd.; NIPPONKOA Insurance Co. (Europe) Ltd. – Counterparty Credit Rating Local Currency AA-/Negative/– AA-/Stable/–

Secom General Insurance Co. Ltd. – Counterparty Credit Rating Local Currency A-/Negative/– A-/Stable/–; Financial Strength Rating Local Currency A-/Negative/– A-/Stable/–

Sompo Japan Insurance Inc.; Sompo Japan Himawari Life Insurance Co. Ltd.; Sompo Japan Insurance (Hong Kong) Co. Ltd. – Financial Strength Rating Local Currency AA-/Negative/– AA-/Stable/–

Sompo Japan Insurance Inc.; Sompo Japan Himawari Life Insurance Co. Ltd. – Counterparty Credit Rating Local Currency AA-/Negative/– AA-/Stable/–

Source: Standard & Poor’s

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