Best Affirms Sompo’s Ratings; Upgrades U.S. Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit rating (ICR) of “aa-” of Sompo Japan Insurance Inc., and has revised the outlook for the ICR to stable from positive; the outlook for the FSR remains stable.

“The ratings reflect Sompo Japan’s strong market presence, efficient distribution channels and diversified profit base,” said Best. “The change in outlook reflects the deterioration in capitalization in fiscal years 2007 and 2008.”

The rating agency added: “Sompo Japan is one of the leading non-life insurance companies in Japan. As of fiscal year 2007, total assets were JPY 5.4 trillion ($54 billion), gross premiums written were JPY 1.6 trillion ($16 billion) and adjusted capital was JPY 1.5 trillion ($15 billion).

“Along with its strong agent distribution channel, Sompo Japan is also well positioned in other channels such as banks and engages in cross-selling opportunities with companies that have large databases. These diverse and efficient distribution channels enabled the company to maintain a strong market position in various business lines.

“On a consolidated level, the life subsidiary, Sompo Japan Himawari Life, has started to contribute a considerable amount of profit (performance of the life operation is measured on embedded value basis). According to the company’s mid-term plan, Sompo Japan expects to generate 35 percent of its profit from the life operation.”

However, Best noted that the overall result will most likely deteriorate in fiscal year 2008, “due to losses stemming from investments and overseas financial guarantee insurance.” But, Best also indicated that the “domestic underwriting result is expected to improve in fiscal year 2008 and going forward. The combined ratio increased in fiscal year 2007 due to higher competition in motor business and increased expenses. The company was unable to improve the expense ratio over the last two years due to non-payment issues. As the premium rate in motor business has been adjusted and as the expense ratio is expected to improve, the underwriting result will show a gradual improvement going forward.

Partially offsetting these positive rating factors are the deterioration of capitalization due to high equity exposure and losses stemming from financial guarantee insurance.”

In addition Best noted that “despite the efforts to reduce stock holdings since fiscal year 2002, total equity investments to invested assets remained high. As the stock market experienced a steep decline in fiscal year 2007 and the first half of fiscal year 2008, Sompo Japan’s capitalization has weakened. The local solvency ratio stood at 809 percent as of September 2008 compared to 1,010 percent in fiscal year 2006.”

In a concurrent action, Best said it has upgraded the FSR to ‘A+’ (Superior) from ‘A’ (Excellent) and the ICR to “aa-” from “a” of New York-based Sompo Japan Insurance Company of America (SJA). Best also upgraded the FSR to ‘A+’ (Superior) from ‘A-‘ (Excellent) and the ICR to “aa-” from “a-“of Sompo Japan Fire and Marine Insurance Company of America (SJFM), and has assigned an FSR of ‘A+’ (Superior) and an ICR of “aa-” to Sompo Japan US Group, which is comprised of SJA and SJFM. The outlook for all ratings is stable.

Best said these “rating actions reflect SJA’s status as an integral subsidiary of Sompo Japan. Additionally, the rating action of SJFM is also reflective of the quota share reinsurance agreement it has executed with its immediate parent, SJA, whereby SJFM cedes 100 percent of premiums and reserves to SJA.”

Source: A.M. Best – www.ambest.com