HONG KONG--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit rating (ICR) of “aa-” of Sompo Japan Nipponkoa Insurance Inc. (SJNK) (Japan). A.M. Best also has affirmed the FSR of A- (Excellent) and the ICR of “a-” of SJNK’s subsidiary, NIPPONKOA Insurance Company (China) Limited (NKC) (China). The outlook for each rating remains stable. Concurrently, 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 reinsured affiliate, 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 each of these ratings remains stable. Additionally, A.M. Best has revised the outlooks to negative from stable and affirmed the FSR of A- (Excellent) and the ICR of “a-” of Canopius US Insurance, Inc. (Canopius US) (Wilmington DE).
The rating affirmations reflect SJNK’s strong-risk adjusted capitalization, improved operating performance and sound business profile. SJNK’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains supportive of the current ratings despite a year-on-year decline in capital and surplus, which was negatively impacted by a decrease in unrealized gains, due to weak financial markets during this period. However, A.M. Best expects the company’s risk-adjusted capitalization to improve with a planned issuance of subordinated debt in 2016. The company’s financial leverage is expected to remain within A.M. Best’s guidelines to support the current rating level.
SJNK reported an improvement in operating performance, primarily due to favorable underwriting results that offset weak investment results. Moreover, the company introduced a risk-based return approach in order to improve profitability, which strengthened risk controls on product lines.
Partially offsetting these positive rating factors are the high exposure to equity investments as compared with total capital and surplus, and high catastrophe risk exposures. The company will continue minimizing these two major risks by further reducing stocks and increasing reinsurance coverage.
While positive rating actions are not likely in the near term, negative rating actions could occur if there is a material deterioration in risk-adjusted capitalization due to a significant decline in operating performance. Potential large-scale catastrophe events or an excessive amount of goodwill from a large-scale acquisition could also put downward pressure on the ratings if capital levels are significantly affected.
The rating affirmations of NKC reflect its strong risk-adjusted capitalization and wide range of parental support. NKC is scheduled to merge with Sompo Japan Nipponkoa Insurance (China) Co., Ltd. (SJC), pending regulatory approval. NKC and SJC are 100% owned by SJNK.
NKC’s risk-adjusted capitalization, as measured by BCAR, slightly declined in fiscal-year 2015 due to higher investment risk. Nonetheless, the risk-adjusted capitalization remains supportive of the current ratings on the basis of low underwriting leverage and a strong reinsurance panel.
Partially offsetting factors include volatile operating results in the past five years, mainly driven by a high expense ratio due to NKC’s small scale. Although the planned merger is expected to enhance its business profile within its target market of Japanese corporate clients based in China, overall profitability is expected to remain sluggish.
While positive rating action is not likely, negative rating action could occur if there is material deterioration in the company’s underwriting experience or in its risk-adjusted capitalization.
The ratings of SJA and SJFM are based on their role and strategic importance to SJNK, along with explicit support provided by SJNK in the form of quota share reinsurance. The ratings also reflect the implied support to be provided by SJNK in the future in order to support the group’s U.S. operations.
The revised outlooks of Canopius US take into consideration recent unfavorable loss experience, significant adverse reserve development recorded in 2015 and execution risk as the company takes strategic initiatives to address financial performance. Of concern is the period of time it will take for corrective actions to materialize in improved underwriting performance. Significant actions have been implemented to address the issued underlying operating performance. Nonetheless, a sufficient period of time must elapse to determine sustainability of an improving trend. These factors are offset by Canopius US’ supportive risk-adjusted capitalization, the recognition of its importance within the Sompo Canopius Group and ultimately as part of the Sompo Japan organization. Positive rating action is unlikely in the near term given the operation and execution risk issues. Factors that may lead to negative rating action include failure to gain traction from strategic initiatives, continued poor underwriting performance, adverse trends in claim frequency or severity, insufficient premium writings to sustain necessary cash flow or operating results or shrinkage of the book of business to unsustainable levels. Any perceived reduction in the implicit or explicit support to Canopius US by the parent organization also would negatively influence the company’s rating.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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