A.M. Best Affirms Ratings of Sompo Japan Insurance Inc., NIPPONKOA Insurance Company Ltd and NIPPONKOA Insurance Company (China) Limited Business Wire HONG KONG -- July 11, 2013 A.M. Best Asia-Pacific Limited has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit rating (ICR) of “aa-” of Sompo Japan Insurance Inc. (Sompo Japan) (Japan) and NIPPONKOA Insurance Company Ltd (NIPPONKOA) (Japan). A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of NIPPONKOA Insurance Company (China) Limited (NIPPONKOA China). The outlook for all ratings is stable. The affirmation of the ratings reflects Sompo Japan’s adequate level of risk-adjusted capitalization and its continuous actions to improve its profitability. Sompo Japan’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), has improved in fiscal year 2012, which remains at an adequate level to support its current ratings. A.M. Best recognizes that the company’s capitalization will further improve in the intermediate term, which should be the result of substantial reduction in its investment risk and enhancement of reinsurance protection. In March 2013, Sompo Japan issued the subordinated bonds worth USD 1.4 billion that is expected to replace the existing subordinated bonds issued in 2009, which is expected to reduce funding costs. The financial leverage ratio is expected to remain at an adequate level to support the current ratings. Sompo Japan’s profitability has improved in fiscal year 2012 primarily owing to the increases in premium rates of the major auto insurance products and substantial reduction in strategic stock holdings. Sompo Japan and NIPPONKOA, the core subsidiaries of NKSJ Holdings Inc., will be merged in fiscal year 2014, which should lead to an improvement in operating efficiency of the integrated entity, despite a one-time increase in operating costs related to the integration of an IT system in the near term. Offsetting rating factors are high investment leverage and large exposure to catastrophe risks. Although Sompo Japan has reduced its strategic holding stock in the past years, the investment leverage (investment amount into stock excluding subsidiaries’ stock to adjusted capital and surplus) remained high at about 70% at the end of March 2013. Sompo Japan is highly exposed to catastrophe risks such as earthquakes, tsunamis and typhoons mainly from the domestic region. Despite the adequate level of reinsurance coverage, the large scale of natural disasters could have a negative impact on its capitalization. Positive rating actions could arise if there is a material improvement in Sompo Japan’s operating performance or risk-adjusted capitalization. Negative rating actions 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. The affirmation of the ratings of NIPPONKOA reflects its robust capitalization, strengthened market presence through the merger with Sompo Japan and the improvement in its profitability. NIPPONKOA is expected to maintain its strong risk-capitalization in the intermediate term on the back of its reduction of strategic holding stock as one of the major initiatives outlined by NKSJ Holdings Inc. The integrated entity of NIPPONKOA and Sompo Japan is expected to own the largest market share of about 27.5% in fiscal year 2011, compared to NIPPONKOA’s market share of 9.1%. NIPPONKOA’s profitability is expected to further improve, helped by recovery in auto underwriting results and an increase in investment income partly generated by the realized capital gains from sales of the strategic holding stock. Offsetting factors include NIPPONKOA’s large exposure to catastrophe risks and high exposure to stock market volatility. The investment leverage (investment amount into stock excluding subsidiaries’ stock to adjusted capital and surplus) remained high at about 90% at the end of March 2013, which could put pressure on its capitalization under the sharp deterioration in stock market conditions. Furthermore, the company is highly exposed to catastrophe risks such as earthquakes, tsunamis and typhoons from the domestic region, which could have a negative impact on its capitalization. Positive rating actions could arise for NIPPONKOA if there is a material improvement in its operating performance or risk-adjusted capitalization. Negative rating actions could occur if there is an adverse impact to NIPPONKOA’s risk-adjusted capitalization due to a material deterioration in its operating performance and/or large-scale occurrences of catastrophe events. The rating affirmations of NIPPONKOA China reflect its strong risk-adjusted capitalization, improved operating performance as well as the support from its parent company, NIPPONKOA, in areas of business development, operation and reinsurance. NIPPONKOA China’s capital position has remained strong in spite of the buoyant premium growth over the past three years. The company’s risk-adjusted capitalization, as measured by BCAR, is expected to remain supportive for its projected business growth in the medium term. In fiscal year 2012, the company’s operating loss declined from CNY 5.8 million to CNY 3.7 million as a result of higher interest income and a lower exchange rate loss. NIPPONKOA China is scheduled to merge with Sompo Japan Insurance (China) Company, Limited in 2014 after getting legal authorization for the transaction. Until then, the two companies will continue to operate separately. While positive rating actions are unlikely in the near term, negative rating actions may occur if NIPPONKOA China’s profitability deviates adversely from its business plan or there is a material deterioration in its risk-adjusted capitalization and/or operating performance. The methodology used in determining these interactive ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Ratings are communicated to rated entities prior to publication, and unless stated otherwise, the ratings were not amended subsequent to that communication. A.M. Best Asia-Pacific Limited is a subsidiary of A.M. Best Company. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. Contact: A.M. Best Irene Chan Associate Financial Analyst +852-2827-3423 firstname.lastname@example.org or Seewon Oh Senior Financial Analyst +852-2827-3404 email@example.com or Rachelle Morrow Senior Manager, Public Relations +1-908-439-2200, ext. 5378 firstname.lastname@example.org or Jim Peavy Assistant Vice President, Public Relations +1-908-439-2200, ext. 5644 email@example.com
A.M. Best Affirms Ratings of Sompo Japan Insurance Inc., NIPPONKOA Insurance Company Ltd and NIPPONKOA Insurance Company (China)
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