AM Best Affirms Credit Ratings of MS&AD Insurance Group Holdings, Inc.'s Main Operating and US Subsidiaries
AM Best has affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of "aa" (Superior) of Mitsui Sumitomo Insurance Company, Limited (MSI (News - Alert)) (Japan) and Aioi Nissay Dowa Insurance Company (ADI) (Japan).
Concurrently, AM Best has confirmed the FSR of A+ (Superior) and the Long-Term ICRs of "aa" (Superior) of MSI's U.S. operating companies, which are domiciled in New York, NY: Mitsui Sumitomo Insurance Company of America (MSIA), Mitsui Sumitomo Insurance USA Inc. (MSU) and MSIG Specialty Insurance USA Inc. (MSIGS).
AM Best also has affirmed the FSR of A- (Excellent) and the Long-Term ICR of "a-" (Excellent) of Aioi Nissay Dowa Insurance (China) Company Limited (ADIC) (China). The outlook for all of the aforementioned Credit Ratings (ratings) is stable. These companies are owned ultimately by MS&AD Insurance Group Holdings, Inc. (MS&AD), a major non-life insurance group based in Japan.
The ratings of MSI reflect the group's balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).
The ratings of MSI have been extended to MSIA, MSU and MSIGS, as these companies continue to hold a strategically important role within the organisation as U.S. domestic insurers, and receive the benefit of strategic direction and explicit support provided through internal reinsurance. The ratings also reflect their strong risk-adjusted capitalisation and additional implicit support provided by the parent. Effective Jan. 1, 2015, MSIA, MSU and MSIGS operate under a pooling agreement. This further strengthens the relationship among the U.S.-based entities and vertically through the organisation.
MSI's balance sheet strength mainly reflects its risk-adjusted capitalisation at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR). This assessment also is supported by the company's low financial leverage and good quality of capital. Partially offsetting factors include the relatively large portion of its investments allocated in equity securities, which exposes MSI's risk-adjusted capitalisation to equity price risk in the event of market volatility. However, AM Best considers the company's capital buffers sufficient to absorb the risks associated with those investments. The rating also reflects the balance sheet strength assessment of strongest of MS&AD, which is supported by its high level of available capital, as well as high financial flexibility that enables good access to capital and the debt markets.
The operating performance of MSI remained strong, supported by steady premium growth over the past five years and a stable five-year loss ratio of approximately 62.3%, excluding compulsory auto insurance. In fiscal year 2020, the company's underwriting performance before catastrophe reserve provisions improved due to less severe domestic natural catastrophe losses and a decrease in auto insurance incurred losses during the COVID-19 pandemic. However, overseas business was affected negatively by the COVID-19 pandemic, mainly driven by significant losses from the MS Amlin group, albeit it has been showing improvements and recovery lately.
MSI is a major non-life insurer in Japan with a solid reputation and position in its domestic market. The company continues to be a market leader and holds a significant share of approximately one-fifth of the highly consolidated domestic non-life insurance segment in Japan, in terms of net premiums written. The company also has a sizable overseas insurance business that contributes approximately 30% of its consolidated net premium income, and it is looking to further increase the scale of its overseas operations to diversify its sources of profit.
Negative rating actions could occur if there is material deterioration in risk-adjusted capitaliation caused by substantial investment losses or large-scale natural catastrophes. Negative rating actions also could occur if there is significant deterioration in MS&AD's credit profile, including its risk-adjusted capitalisation, financial leverage or interest coverage levels.
The ratings of ADI reflect its balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, neutral business profile and appropriate ERM. The ratings also consider ADI's strategic importance to its parent company, MS&AD, as one of the two core operating entities and an integral part of the group.
ADI's balance sheet strength assessment reflects the company's strongest level of risk-adjusted capitalisation, as measured by BCAR, conservative financial leverage, and good quality of capital. Partially offsetting factors include the relatively high investment allocation in common stocks, which exposes ADI's balance sheet to considerable equity price risk in the event of market volatility. However, AM Best believes the significant amount of adjusted capital held by ADI is sufficient to absorb this risk.
ADI's operating performance has been strong and consistent, supported by steady premium growth over the past five years. Despite the impact of COVID-19, the company continued to record premium growth during fiscal year 2020 (FY2020), mainly attributable to strong sales in its auto and fire businesses. The company's underwriting performance before catastrophe reserve provision also improved in FY2020 due to a decrease in auto insurance incurred losses during the COVID-19 pandemic. Prospectively, AM Best expects that ADI's underlying performance will remain at a strong level in the absence of major natural catastrophe events.
As one of the major insurers in Japan's non-life market, ADI is focused mainly on its domestic market and has a relatively small overseas portfolio. The company's domestic non-life business benefits from its long-term business partnership with Nippon Life Insurance Company and Toyota Motor Corporation. However, its small overseas book of business limits the company's growth potential due to low growth at home.
Negative rating actions could occur if there is material deterioration in risk-adjusted capitalisation caused by substantial investment losses or large-scale natural catastrophes. Negative rating actions also could occur if there is significant deterioration in the credit profile of MS&AD, including its risk-adjusted capitalisation, financial leverage or interest coverage levels.
The ratings of ADIC reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate (ERM). The ratings also reflect the strategic importance of the company to its parent, ADI, as a major contributor of overseas business profit and a key component of ADI's business expansion in China.
AM Best assesses ADIC's risk-adjusted capitalisation as very strong, as measured by BCAR, supplemented by moderate underwriting leverage, conservative investment asset allocation and modest reinsurance leverage. ADIC's operating performance also has been consistently profitable, with a five-year operating ratio of 95.7% and five-year return on equity of 7.3% (2016-2020).
ADIC focuses on personal lines business in China, primarily motor insurance, which is of a high-frequency low-severity nature. Similar to many other motor insurance underwriters in China, AM Best expects that ADIC's underwriting performance will deteriorate over the near to intermediate term, following the implementation of the comprehensive motor insurance reform in September 2020. Nevertheless, in response to these challenges, AM Best notes that the management will implement various portfolio remediation measures to stabilise its prospective underwriting performance.
Similar to other relatively small non-life insurers that specialise in one market, ADIC's risk profile reflects a high business concentration risk. However, AM Best considers the company's risk management capabilities to be aligned appropriately with its risk profile. This is supported mainly by its ongoing focus to build a stable and profitable book of insurance business in China, as well as its ongoing initiatives to develop sustainable partnerships with business partners that have competitive advantages within the region.
Negative rating action could arise if ADIC's underwriting or operating performance does not improve in line with AM Best's expectations. Negative rating action also could occur if there is a material decline in its risk-adjusted capitalisation, or a reduced level of support from its parent, ADI.
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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