A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit rating (ICR) of “aa-” of Sompo Japan Insurance Inc. as well as the FSR of ‘A ‘(Excellent) and ICR of “a” of its subsidiary, Singapore-based Tenet Insurance Company Ltd.
The outlook for all of the ratings is stable.
The ratings reflect Sompo Japan’s “adequate level of risk-adjusted capitalization, expected improvement in profitability, which is driven by substantial reduction in its stock holdings, as well as recovery of underwriting profitability,” Best explained.
Sompo Japan’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is “expected to remain at an adequate level to support its current ratings, although it has weakened over the past few years,” Best said. The rating agency also indicated that it “recognizes that the company’s capitalization will gradually improve in the mid-term, which is led by counter measures that include substantial reduction in its investment risks, stock holdings in particular, and adjustment of the reinsurance coverage to an appropriate level.”
Sompo Japan and NIPPONKOA Insurance Company Ltd., the core subsidiaries of NKSJ Holdings Inc., will be merged in fiscal year 2014, which, Best said, “should lead the new integrated business entity to reduce the its spending in operating costs in the mid-term. In addition to the improvement in operating efficiency, Sompo Japan is expected to benefit from the recovery in its underwriting results, which is driven by favorable revisions in premium rates of major products.” (See also related article on Best’s ratings on NIPPONKOA)
As offsetting factors Best cited the “deterioration in the absolute amount of Sompo Japan’s risk-adjusted capital and surplus, its large exposure to catastrophe risks and volatile operating performance.
“Sompo Japan’s adjusted capital and surplus declined 14 percent to JPY 977 billion [$123.214 billion] in fiscal year 2011 following an 8 percent decline a year earlier. The pace of recovery in the company’s capital and surplus would be moderate given its high dividend payout ratio to NKSJ Holdings Inc. (as the core subsidiary of the group) and the continued weak financial market conditions. Also, Sompo Japan is highly exposed to catastrophe risks such as earthquakes, tsunami and typhoons, which could result in substantial claims, and consequently, the deterioration in its capitalization.
“Downward rating pressure could arise if there is an adverse impact to Sompo Japan’s risk-adjusted capitalization due to a material deterioration in its operating performance and/or large-scale occurrences of catastrophe events.”
Best said its ratings of Tenet “recognize the implicit support it receives from Sompo Japan via its wholly owned subsidiary, Sompo Japan Asia Holdings Pte. Ltd. This implicit support includes sharing the group’s in-house facilities (both underwriting and investment) and Sompo Japan’s participation in Tenet’s reinsurance programs. This support acknowledges that Tenet’s integration with its sister company, Sompo Japan Insurance (Singapore) Pte. Ltd. (Sompo Singapore), is in progress and is part of the consolidation plan of NKSJ Holdings, Inc. The newly merged entity of Sompo Singapore and Tenet will start operating in January 2013.”
Best added that the ratings also reflect Tenet’s “strong risk-based capitalization, continuous favorable underwriting income and sound liquidity of its invested assets. Tenet’s capital position remained strong in 2011, due to accumulated retained profits and stable net underwriting leverage that stood at 0.5 times. Eighty percent of Tenet’s assets are composed of cash, bonds and listed equities, which translate into a superior degree of liquidity.”
However, as offsetting factors Best noted that “high costs related to Tenet’s merger with Sompo Singapore, prevailing soft market conditions in Tenet’s operating market and revision of the compensation limit amount for work injury compensation in Singapore. Tenet’s major lines of business are motor and workers’ compensation, for which the operating environment is soft in Singapore.”
Source: A.M. Best
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