Best Lowers Unum Japan Rating to ‘BB+’

A.M. Best Co. announced that it has downgraded the financial strength rating to B++ (Very Good) from A- (Excellent) of Unum Japan Accident Insurance Co. Ltd., removed the company from under review, and revised its outlook to stable from negative.

“The rating reflects A.M. Best’s opinion that Unum Japan is not a core subsidiary within the UnumProvident group,” said Best. “As such, it should be rated lower than UnumProvident Corporation’s U.S. operating subsidiaries. The rating also considers Unum Japan’s lessened reinsurance security, inability to improve statutory surplus and lack of sustainable strengths in a competitive marketplace.”

The rating agency noted that it had downgraded the financial strength ratings of UnumProvident’s U.S. subsidiaries to A- (Excellent) from A (Excellent) last April, “due to the organization’s concentrated business profile and concerns regarding the earnings outlook for the entire organization, given the ongoing low interest rate environment and weak U.S. economy.” It added that this was a factor in its decision to downgrade Unum Japan’s financial strength rating, given the Japanese subsidiary’s non-core status within the organization.

“As a consequence of its parent’s ongoing challenges, Unum Japan’s reinsurance security has been adversely affected, since Unum Life Insurance Co. of America reinsures a significant portion of Unum Japan’s underwriting risks,” the bulletin continued. “Additionally, this reinsurance treaty has had the net impact of increasing the Japanese subsidiary’s reported loss ratio, thereby creating a strain on statutory surplus over time.”

Best said that in the long term it “remains cautious about Unum Japan’s ability to stay competitive in Japan’s disability income market. The lack of a proprietary agency force will continue to be a significant hurdle that the company must overcome to further strengthen its competitive position against indigenous insurers with well-established business profiles.

“These challenges are partially offset by the company’s secure stand-alone capitalization, conservative investment portfolio and improving economies to scale,” it added.

The bulletin also noted that based on “Best’s Capital Adequacy Ratio (BCAR) Unum Japan’s level of capitalization as of fiscal year-end 2002 on a stand-alone basis falls within the secure range. The stable outlook assigned mainly reflects management’s intention to maintain a prudent local solvency margin in the foreseeable future. The company’s conservative investment portfolio is also viewed favorably in light of the capital market conditions in Japan. Nearly all invested assets are allocated to cash and short-term fixed-income instruments, protecting the capital base from volatility in asset prices.

“Going forward, Unum Japan’s operating efficiency is expected to improve in line with its declining expense ratio. The company will likely benefit from continued market growth in the near term, with fixed expenses being spread over an increasing premium base.”