Japanese Typhoons Put Downward Pressure on Creditworthiness of Insurers: S&P

October 4, 2018

The recent run of large natural disasters to hit Japan likely has put downward pressure on the creditworthiness of the nation’s three largest non-life insurance groups, according to S&P Global Ratings in a market briefing.

Following July’s heavy rains, Typhoon Jebi caused severe damage in western Japan in early September while Typhoon Trami then swept across the Japanese archipelago at the end of the month.

Japan’s three largest non-life insurance groups – Tokio Marine Group, MS&AD Insurance Group, and SOMPO Holdings Group – have not yet disclosed losses relating to the two typhoons.

However, given the typhoons’ sizes and paths, S&P said it assumes the three groups may incur losses in the areas of voluntary insurance for automobiles and fire (flood) insurance.

Based on this assumption, each group will hold a certain amount of incurred losses up to the “attachment point” (where the reinsurer will step in and pay for the excess), in excess loss cover, said S&P. Accordingly, the three groups will likely incur additional incurred losses on a net basis from the two typhoons, added the ratings agency.

Further, the three group’s net incurred losses from other large global disasters are still unknown but may heighten uncertainty over their profit projections for the current fiscal year, said S&P, citing the examples of Hurricane Florence, which hit the eastern part of the U.S. in the middle of September, and Typhoon Mangkhut, which struck the Philippines, China, and Hong Kong.

S&P expects the earthquake that struck Hokkaido in September to have a limited impact on the groups.

Following the flooding in Japan in July, S&P issued a report that predicted a limited impact on the insurance groups’ creditworthiness, based on an assumption that losses from natural disasters that occur in the rest of fiscal 2018 (ending March 31, 2019) would be at about the level that each group estimated in their full-year forecasts. (This S&P viewpoint was published in an Aug. 24 report titled “Creditworthiness Of Japan’s Major Non-Life Insurers Seen Largely Unscathed After July’s Torrential Rains.”)

“However, we believe that the series of large natural disasters that have unfolded since we published that report may weaken each groups’ creditworthiness through downward pressure on our assessment of their capital and earnings,” affirmed S&P.

The companies’ incurred losses are expected to be treated as an earnings event on their accounting because the groups will partly make up for payment of insurance claims through reversals of catastrophe loss reserves and sales of strategically held stocks, said S&P, noting that the companies’ total adjusted capital (TAC) already includes catastrophe loss reserves and unrealized gains from strategically held stocks.

“Following the disasters, the size of the increase in TAC at the groups may be lower than we initially forecast, while we may raise our risk volume estimates to reflect the revision of losses from natural disasters. If this happens, our assessment of the three groups’ capital and earnings may come under pressure,” said S&P.

Source: S&P Global Ratings

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