Best Affirms Aioi Nissay Dowa and Subs Ratings; Outlook Stable

June 18, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a+” of Japan’s Aioi Nissay Dowa Insurance Company Limited (ADI) and its subsidiary, New York-based Aioi Nissay Dowa Insurance Company of America (ADIA). Best also affirmed the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of ADI’s subsidiary, Aioi Nissay Dowa Insurance (China) Company Limited (ADIC).

The outlook for all of the ratings is stable.

The ratings reflect ADI’s strong market presence in both the Toyota and Nissay markets, expected improvement in operating performance and reduction in its risk exposure in its investment portfolio. A.M. Best acknowledges ADI receives implicit and explicit support from its parent company, MS&AD Insurance Group Holdings, Inc.

ADI maintains its “strong position in the Toyota and Nissay markets, established by the key shareholders of MS&AD Insurance Group Holdings, Inc., which is expected to report robust growth going forward.,” Best explained.

“ADI is expected to benefit from an improvement in operating performance driven by improving auto underwriting results and a reduction in its system development cost as the consolidation processes between the previous business units of Aioi and Nissay Dowa are to be completed.

“It is also anticipated that ADI will continue to scale back the investment into the stock, which could stabilize the capital position under the volatile stock market conditions. Furthermore, ADI, as a group company of MS&AD Insurance Group Holdings, Inc., continues to benefit from the strong relationship with group companies as well as business alliance partners to further grow in the domestic and overseas non-life markets.”

As offsetting factors Best cited “the deterioration in ADI’s capitalization as it was hit by a large scale of natural catastrophe events including the Japan earthquake and the Thai floods in the past two years, in addition to weak financial market conditions. Although the company has continued to reduce its exposure to the stock market, the investment leverage remains relatively high due to the substantial decline in its capital and surplus in the past two years.”

Best said “ADI’s capital and surplus declined by JPY 229 billion [$2.895 billion] to JPY 687 billion [$8.687 billion] in the past two years. ADI is exposed to catastrophe risks such as earthquakes, tsunamis and floods in both the domestic and overseas markets.

“The ratings of ADIA are based on its strong stand-alone capitalization, role and strategic importance to ADI, the explicit parental support provided by ADI in the form of a comprehensive reinsurance program and contributed capital, and the implied support of future parental commitment.

“Downward rating pressures could arise if there is an adverse impact to the risk-adjusted capitalization, material deterioration in operating performance and a worsening Japanese economy.

“The ratings of ADIC reflect its solid risk-adjusted capitalization and continued profitable operating performance in its early years of operation. The ratings also recognize the continued parental support from ADI in the areas of capitalization, business development, operations and reinsurance.”

Best described ADIC as “well capitalized to support its future business growth. The company recorded after-tax operating profits for both 2010 and 2011 primarily underpinned by interest income and local government subsidies. A higher underwriting loss was recorded in 2011 mainly due to the increase in expenses associated with the setup cost of the new branch office in Zhejiang during the year.” Best said it “believes expense control will be crucial for ADIC to improve its underwriting profitability going forward.

“Offsetting rating factors are ADIC’s continued high expense ratio and the implementation risk of its business plan as an insurer with a short operating history. Positive rating actions could occur if the company can generate consistent operating income and exceed its business plan over the long term.

“Negative rating actions could occur if ADIC’s profitability deviates adversely from its business plan, there is a significant scale back in parental support, or risk-adjusted capitalization materially deteriorates.”

Source: A.M. Best

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