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FOR IMMEDIATE RELEASE
HONG KONG - JULY 11, 2014 02:06 PM (EDT)
A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (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) (China). Additionally, A.M. Best has affirmed the FSR of A+ (Superior) and the ICRs of "aa-" of Sompo Japan Insurance Company of America (SJA) and its wholly owned, reinsured subsidiary, Sompo Japan Fire and Marine Insurance Company of America (SJFM), collectively known as Sompo Japan US Group (both domiciled in New York, NY). The outlook for all ratings is stable.
The ratings of Sompo Japan and NIPPONKOA reflect their robust risk-adjusted capitalization and strong market profile. Sompo Japan and NIPPONKOA, the core subsidiaries of NKSJ Holdings Inc., started the integration process of their operations in 2014 with an announced plan that the two companies will be merged into Sompo Japan Nipponkoa Insurance Inc. (Sompo Japan Nipponkoa) in September 2014. The integrated entity is expected to be ranked as the largest non-life insurer in Japan in terms of premiums written. Sompo Japan Nipponkoa is also expected to benefit from the recent acquisition of Canopius Group Limited, which enhanced its business profile in overseas markets and further diversified operations. Sompo Japan and NIPPONKOA reported improvement in their risk-adjusted capitalization year over year due to the increase in available capital.
This capital increase was mainly driven by favorable equity market conditions and adjustment of the reinsurance protection.
Offsetting rating factors include volatile operating performance, high exposure to stock investments and large exposure to catastrophe risks. Although both companies' operating ratios have improved since fiscal-year 2011, the integrated entity is expected to report a large amount of one-off, merger-related costs in fiscal-year 2014.
Both companies' exposure to stock investments remains relatively high despite efforts to reduce investment allocations to strategic domestic stocks. In addition, the companies have increased foreign securities over the past five years. In particular, foreign stocks (excluding stock of foreign subsidiaries) accounted for approximately one third of the total balance of foreign securities at the end of March 2014. Additionally, Sompo Japan and NIPPONKOA are highly exposed to catastrophe risks such as earthquakes, tsunamis and typhoons. In addition, the recent acquisition of Canopius Group Limited is expected to increase the catastrophe exposure to Sompo Japan, as well as the integrated entity. Although the reinsurance coverage is considered adequate, large-scale natural disasters could have a negative impact on capitalization.
Sompo Japan and NIPPONKOA are well positioned at the current rating levels. Downward rating pressure could arise at either company should a material decrease in capitalization occur due to substantially unfavorable operating performance or if a delay in the merger process causes a significant deterioration in their business profile.
The ratings affirmation of NIPPONKOA China reflect its solid risk-adjusted capitalization, conservative and profitable investment portfolio, strong liquidity and continued parental support in terms of operations, reinsurance and brand recognition.
The company's risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), remained supportive of its current ratings, despite unfavorable operating performance and strong growth in underwriting scale. However, NIPPONKOA China benefited from the stable stream of interest income from its conservative investment strategies to partially offset the underwriting losses in fiscal-year 2013.
NIPPONKOA China is scheduled to merge with Sompo Japan Nipponkoa Insurance (China) Co., Ltd. in 2015, subject to legal authorization for the transaction. The post-merger entity is considered to be of strategic importance to NKSJ Holdings Inc., and continued parental support is expected over the long term.
Partially offsetting factors include the unfavorable operating performance and the highly competitive operating environment in the Chinese non-life market.
While positive rating actions are unlikely in the near term, negative rating actions may occur if there is a material deterioration in the company's risk-adjusted capitalization or operating performance.
The ratings of SJA and SJFM are based on Sompo Japan US Group's role and strategic importance to Sompo Japan, and the explicit support provided by Sompo Japan in the form of quota share reinsurance. The ratings also reflect the implied support to be provided by Sompo Japan in the future in order to support the group's operations in the United States.
Given the explicit support SJA has in place with Sompo Japan, any upward or downward movement of the ratings of Sompo Japan would influence the ratings of SJA and SJFM. In addition, if SJA's capitalization or operating performance falls markedly short of A.M. Best's expectations, negative rating actions to SJA and SJFM could ensue.
The methodology used in determining these 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.
This rating announcement has been issued by A.M. Best Asia-Pacific Limited, which is a subsidiary of A.M. Best Company.