A.M. Best Upgrades Ratings of NIPPONKOA Insurance Company Ltd

A.M. Best Co. has upgraded the financial strength rating (FSR) to A+ (Superior) from A (Excellent) and the issuer credit rating (ICR) to “aa-” from “a+” of NIPPONKOA Insurance Company Ltd (NIPPONKOA) (Japan).

Additionally, A.M. Best has affirmed the FSR of A (Excellent) and ICR of “a” of NIPPONKOA Insurance Company (Asia) Limited (NIPPONKOA Asia) (Hong Kong). A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of NIPPONKOA Insurance Company (China) Limited (NIPPONKOA China) (China). These companies are all subsidiaries of NIPPONKOA. The outlook for all ratings is stable.

The rating upgrades reflect NIPPONKOA’s solid risk-capitalization, the expected benefits from its merger with Sompo Japan Insurance Inc. (Sompo Japan) as the core subsidiary for the group and the anticipated improvement in its profitability.

NIPPONKOA is expected to maintain its solid risk-capitalization in the mid term owing to its efforts to reduce the stock holdings, which are in line with the group’s initiatives. Also, the company should benefit from its business integration with Sompo Japan as this could strengthen NIPPONKOA’s market presence. NIPPONKOA’s profitability also is expected to improve going forward, given the reduction in its cost base through the merger and the recovery in its underwriting profitability.

Offsetting ratings factors include a decrease in the absolute amount of NIPPONKOA’s risk-adjusted capital and surplus, its large exposure to catastrophe risks and high exposure to stock market volatility. NIPPONKOA’s adjusted capital and surplus declined 11% to JPY 544 billion in fiscal year 2011 following a 9% decline a year earlier. The pace of recovery in its adjusted capital and surplus would be moderate given its high dividend payout ratio (as the core subsidiary for the group) and the continued weak financial market conditions. NIPPONKOA’s exposure to the stock market remains relatively high at 26% of total invested assets at the end of March 2012, which could put pressure on its capitalization under the weak stock market conditions. Furthermore, the company is highly exposed to catastrophe risks such as earthquakes, tsunamis and typhoons, which could result in substantial claims.

Downward rating pressure could arise 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 for NIPPONKOA Asia reflect its excellent risk-adjusted capitalization and stable underwriting performance. The ratings also recognize the ongoing support the company receives from NIPPONKOA in the areas of business generation, operations and reinsurance. Parental support contributes essentially to NIPPONKOA Asia’s niche position as a Hong Kong-based fronting agent that captures insurance businesses from Japanese clients within selected Asian markets. Japanese-related business has consistently predominated the company’s gross premiums written over the past few years.

Partially offsetting these positive rating factors is the competitive general insurance market condition in Hong Kong and the uncertainty arising from the business integration between NIPPONKOA and Sompo Japan.

While the outlook for the above ratings is stable, potential negative rating triggers could occur if NIPPONKOA Asia’s risk-adjusted capitalization and/or operating performance significantly deteriorate.

The rating affirmations for NIPPONKOA China acknowledge its strong risk-adjusted capitalization and improving operating performance. The ratings also consider the full support NIPPONKOA China receives from NIPPONKOA in the areas of management, business development and reinsurance.

NIPPONKOA China’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is well positioned to support its projected business growth over the medium term. The company’s operating loss was narrowed to CNY 5.8 million for 2011, from CNY 7.7 million in 2010 mainly due to higher interest income earned during that period. NIPPONKOA China continues to leverage on the brand name of NIPPONKOA to develop a solid Japanese customer base with quality business within its licensed region.

Partially offsetting these positive factors is NIPPONKOA China’s continued underwriting loss due to its high expense ratio during its early stage of operation and the Thailand flood-related commercial business interruption claims reported in 2011. NIPPONKOA China has adopted a stricter underwriting guideline to mitigate undue risk exposure arising from overseas catastrophic events starting in 2012. The anticipated merger between NIPPONKOA and Sompo Japan may heighten the execution risk of NIPPONKOA China’s business plan over the next two years.

While positive rating actions are unlikely in the near term, negative rating actions may occur if NIPPONKOA China’s risk-adjusted capitalization exhibits significant adverse deviation from A.M. Best’s expectation and if the company fails to execute its business plan or meet the planned underwriting performance.

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. Key criteria utilized include: “Understanding Universal BCAR”; “Rating Members of Insurance Groups”; “Assessing Country Risk”; “Catastrophe Analysis in A.M. Best Ratings”; “Risk Management and the Rating Process for Insurance Companies”; “Rating New Company Formations”; and “Evaluating Country Risk.” Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.