Best Affirms Mitsui Sumitomo Ratings; Upgrades Aioi Nissay Dowa

A.M. Best Asia-Pacific Limited has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit rating (ICR) of “aa” of Japan’s Mitsui Sumitomo Insurance Company Limited (MSI), and has upgraded the FSR to ‘A+’ (Superior) from ‘A’ (Excellent) and the ICR to “aa” from “a+” of Aioi Nissay Dowa Insurance Company Limited (ADI).

Best has 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 of MSI reflect its “adequate risk-adjusted capitalization, strong business profile and improved profitability,” Best explained. “MSI’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and its financial leverage is expected to remain at an adequate level to support the current ratings. MSI’s adjusted capital and surplus (shareholders’ funds + catastrophe reserve + price fluctuation reserve) rose 18 percent to JPY 1,598 billion [$159.63 billion] at the end of March 2013, which is close to the level before the recent large natural disasters occurred, owing to the increase in unrealized gains, which offset the decline in the catastrophe reserve balance.”

Best also noted that “MSI is the main operating subsidiary of MS&AD Insurance Group Holdings, Inc. (MS&AD Group), one of the major insurance group companies based in Japan, due to its material contribution to the group in terms of net premium income and earnings, in addition to its strategic role in the group.

“MSI is expected to further enhance its presence in both domestic and overseas markets, led by the group’s strategic plan of “functional reorganization.” In January 2013, MS&AD Group introduced a plan to reorganize the two non-life insurance subsidiaries of MSI and ADI on a functional basis. MSI is expected to play a key role and will offer comprehensive insurance business and lead business expansion, including the employment of mergers and acquisitions.

“MSI’s operating performance improved in fiscal year 2012 and should continue to improve in the mid-term as the company is expected to benefit from the increases in auto insurance premium rates and cost reductions from the integration of IT systems and implementation of the reorganization plan.”

As partial offsetting factors Best cited MSI’s “exposure to natural catastrophe risks and vulnerability to the adverse financial market movements. MSI is exposed to catastrophe risks, including earthquakes, tsunamis and typhoons, which could result in substantial claims. Although the company has actively sold its stock to reduce market risks, the investment into stock remains at about 30 percent of the total investment portfolio at the end of March 2013, which could weigh on MSI’s capitalization in the event of adverse financial market movements.”

Best indicated that “downward rating pressure could arise if there is an adverse impact to MSI’s risk-adjusted capitalization, material deterioration in its operating performance and a sharp deterioration in the Japanese economy.”

Best said the upgrading of the ratings of ADI is based on its “adequate level of risk-adjusted capitalization, an improvement in operating performance and strong business profile in the retail market, in particular, the Toyota and Nissay markets.” Best also acknowledged that ADI receives implicit and explicit support from the parent company, MS&AD Group.

“ADI’s capitalization remained at an adequate level to support its current ratings,” the report continued. “ADI’s adjusted capital and surplus rose 17 percent to JPY 804 billion [$80.28 billion] at the end of March 2013, which is close to the level prior to the recent large natural disasters, in large part owing to the increase in unrealized gains.

“ADI is expected to further enhance its strong position in the Toyota and Nissay markets, established by the key shareholders of MS&AD Group, as the company benefits from the implementation of the functional reorganizational plan announced by MS&AD Group in January 2013. ADI’s business is expected to further integrate into the MS&AD Group companies by sharing an operating base and headquarter functions with MSI and the holding company.”

Best also explained that “ADI’s operating performance has improved in fiscal year 2012, mainly due to the better investment results amid recovery in financial market conditions.”

As partial offsetting factors Best cited ADI’s “high level of investment leverage and the exposure to catastrophe risks.”

Best said: “Downward pressure could arise if there is a material decrease in capitalization, weakening operating performance, a significant deterioration in the business profile or a delay in the reorganization process.”

Best’s rating affirmations of ADIC “reflect its adequate risk-adjusted capitalization, highly liquid investment portfolio and continued support from its parent company, ADI, in terms of business development, capitalization, operations and reinsurance,” the report said.

“Since its inception, ADIC’s capital position has been strong relative to the size of its underwriting portfolio. Its risk-adjusted capitalization, as measured by BCAR, should remain adequate to underpin the company’s projected business expansion over the coming three years. The parent is anticipated to provide capital support when necessary.

“While maintaining an existing base of Japanese clients, ADIC will ratchet up its effort to develop its domestic portfolio, with plans to increase the premium contribution significantly over the forecasted period through leveraging its Tianjin sub-branch and the close business relationship between its parent company and Toyota Motor Corporation.

“Partially offsetting these positive factors are its high expense ratio and the uncertainties associated with development of its motor business.

“ADIC’s ratings and outlook could be upgraded if it shows a persistent improvement in underwriting performance and meets its business plans in the long term. In contrast, negative rating actions may occur if ADI withdraws support or there is a material deterioration in its risk-adjusted capital position and/or operating performance.”

Source: A.M. Best