While Sompo Japan Insurance (SJ) is exposed potentially to considerable equity risk from sizeable domestic stocks investments and underwriting risk from expanding overseas insurance business, it appears to have ample available capital to absorb such risks, says AM Best.
The global credit rating agency also expects that the company’s announced plan to accelerate the disposal of strategic equity holdings potentially could reduce its overall exposure to equity risk in the forthcoming years.
Strong operating performance
SJ has a track record of strong operating performance, supported by consistent growth in premium income and a five-year average return-on-equity ratio of 8.9% (fiscal years 2019–2023) on a consolidated basis, as calculated by AM Best.
Despite higher incurred losses in automobile insurance for its domestic business in the fiscal year 2023 (FY2023), which ended on 31 March 2024, SJ saw improved domestic underwriting profits driven by improving profit fundamentals of its fire line and reduced natural catastrophe losses during the year.
The company also saw enhanced investment income, benefiting from a favourable interest rates environment and gains on the sale of strategic stock holdings.
SJ’s overseas business, managed by Sompo International Holdings (SIH), the Bermuda-based intermediate holding company under SJ, witnessed improvement in adjusted profit in FY2023, driven by higher investment income and reduced natural catastrophe losses, despite prior year reserve strengthening recorded in the same period.
Ratings affirmed
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 SJ and its subsidiaries. The outlook of these credit ratings is ‘Stable’.
Concurrently, AM Best has affirmed SIH’s Long-Term ICR of “a-” (Excellent). In addition, AM Best has affirmed the Long-Term Issue Credit Rating of “a-” (Excellent) on $335m 7% senior unsecured notes due by 2034 (which is guaranteed by SIH). The outlook of these ratings is ‘Stable’.
The ratings reflect SJ’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).
Balance sheet strength
SJ’s balance sheet strength assessment reflects the company’s strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s financial leverage remains conservative with adjusted debt leverage ratios below 25%, albeit higher compared with its domestic non-life peers in Japan.
Business profile
SJ is the primary operating unit of SOMPO Holdings, its ultimate parent and one of the largest non-life insurance groups in Japan. The company holds a strong market position with approximately a one-quarter share of Japan’s highly consolidated non-life insurance segment, in terms of NPW. In addition, the company has a growing book of overseas insurance business, which accounted for approximately 40% of its NPW and 69% of its adjusted profits in FY2023.
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