A.M. Best Affirms Ratings of Mitsui Sumitomo Insurance Company, Limited, and U.S. Subsidiaries [Health & Beauty Close – Up]

A.M. Best Company has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit rating (ICR) of "aa" of Mitsui Sumitomo Insurance Company, Limited (MSI) (Japan).

A.M. Best also has affirmed the FSR of A+ (Superior) and ICR of "aa" for the U.S. subsidiary entities of MSI: Mitsui Sumitomo Insurance Company of America (New York, New York) and Mitsui Sumitomo Insurance USA (New York, New York), whose pooled results compose Mitsui Sumitomo Insurance Group. The outlook for all ratings is stable.

The ratings reflect MSI's favorable risk-adjusted capital position, low underwriting leverage and competitive expense ratio.

MSI is second among non-life insurers in Japan in terms of absolute capital with an adjusted capital and surplus of JPY 1.6 trillion (USD 19 billion). The company's risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), also remains superior on a consolidated basis despite the stock market decline that occurred after the Great East Japan Earthquake. In addition, the local solvency margin ratio stood at 534.7 percent as of March 31, under the revised standard to be applied from March 31, 2012. Currently, all these indicators remain strong and supportive to the company's current ratings.

Although MSI's BCAR score has decreased in recent years, the risk is heavily concentrated in equity holdings. Hence, the company still has the flexibility to improve its risk-adjusted capitalization as it continues with the sale of equity holdings.

As a result of MSI's capitalization, the company's net underwriting leverage has remained low relative to its peers over the past five years. In fiscal-year 2010, MSI reported that net underwriting leverage was 0.79 times(x), while the weighted average of the top six non-life insurers in Japan was 0.90x.

MSI reported a slight improvement in expense ratio for fiscal- year 2010. Despite an increase in underwriting expenses year on year, the company achieved a lower expense ratio due to its strong premium growth. Compared with its competitors, MSI's expense ratio remained very competitive among non-life insurers in the domestic industry.

Partially offsetting these positive rating factors include the company's higher-than-expected catastrophic losses and significant domestic equity exposure.

Natural disaster losses built into MSI's original forecast for fiscal-year 2011 was JPY 15 billion, of which JPY 11.5 billion was for fire insurance. A.M. Best expects that the actual catastrophe loss likely will greatly exceed this estimate due to the 2011 Thailand floods. A higher-than-expected catastrophic loss will result in an adverse impact on the company's underwriting performance.

As of the end of fiscal-year 2010, 26 percent of total assets were composed of domestic stocks, the highest concentration among major non-life insurance companies in Japan. As a result, a difficult business or financial environment may exert significant pressure on MSI's risk-adjusted capitalization.

A.M. Best Company is one of the world's oldest insurance ratings and information sources.

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