Tokio Marine, Mitsui and Sompo down one notch after cat-filled year

Moody’s Japan KK has downgraded all the long-term ratings of three large Japanese property and casualty (P&C) companies by one notch. All ratings now have a stable outlook.

The affected companies and their current long-term ratings are:

  • Tokio Marine & Nichido Fire Insurance Co (Tokio Marine, Aa3)
  • Mitsui Sumitomo Insurance Co (A1)
  • Sompo Japan Insurance (A1)

The rating action was prompted by the cumulative negative effects on these companies’ capital of losses from various natural disasters in 2011.

In particular, insurance payments for the damage caused by the floods in Thailand in November 2011 have far exceeded the commercial line losses from the 11 March earthquake and tsunami.

Moody’s notes these major Japanese P&C insurers have been suffering from low profitability for a long time, mainly due to their loss-making core automobile businesses.

The scale of these catastrophe losses has been high in relation to their earnings, meaning that they would need several years to organically rebuild the capital lost from these events.

Furthermore, while these companies are taking measures to reduce asset-side risk, they continue to show high exposures to the Japanese stock market, making their capital vulnerable to both catastrophes and investment risk.

Moody’s recognises that all insurers are reducing their underwriting risk, especially for floods and are in some cases increasing reinsurance coverage for natural catastrophes.

While these efforts will help reduce potential losses from their commercial line businesses, Moody’s has concerns that the uncertainties related to natural catastrophe risk assessment will remain and will continue to pressure these entities as they keep expanding their global  businesses.

Tokio Marine’s new rating incorporates the potential negative impact on its credit profile of its pending acquisition of Delphi Financial Group. Even though details of the financing plan have not been announced, the relatively modest size of that transaction means that Tokio Marine’s new IFSR of Aa3 is unlikely to be pressured by the completion of the deal.