Best Affirms Nipponkoa’s ‘A’ Ratings

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a+” of Japanese insurer Nipponkoa Insurance Company Ltd., both with stable outlooks.

“The ratings reflect Nipponkoa’s strong risk-adjusted capitalization, improvement in underwriting results and reduction in equity holdings,” Best noted.

In its analysis, Best explained that, “although the company’s risk-adjusted capitalization has declined for two consecutive years (fiscal years 2007 and 2008),” in Best’s opinion “it is strong enough to support the current ratings.”

The Company is also “taking measures to reduce its asset risks, risk-adjusted capitalization is expected to improve in fiscal year 2009. The company plans to dispose of ‘relationship’ stock holdings amounting to JPY 20 billion [$221 million] (book value basis) in fiscal year 2009.”

In addition Best cited the “lack of major natural catastrophes over the last two years and the company’s efforts to focus on underwriting,” as factors in reducing its loss ratio (on a net claims incurred/net premium earned basis and excluding compulsory automobile liability insurance and earthquake insurance) “to 61.3 percent in fiscal year 2008 from 68.4 percent in fiscal year 2006. With the planned business integration with Sompo Japan toward the end of fiscal year 2009, A.M. Best believes that Nipponkoa will generate significant cost reductions in the medium term.”

However, “the company’s weakened market competitiveness and the high expense ratio compared to its peers,” should be taken into account as offsetting factors, said Best.

“Over the past five years, Nipponkoa’s market competitiveness was challenged by a decline in market share and stagnant premium growth in the domestic non-life market,” Best’s analysis continued. “Although the company made clear that it will not chase volume in the expense of profitability, the base in which the company can generate profit has decreased. Nipponkoa’s gross premium written declined to JPY 756 billion in fiscal year 2008 from JPY 861 billion in fiscal year 2003.

“While Nipponkoa has successfully reduced the absolute size of its total underwriting expense and commissions, the high expense ratio relative to its peers has been maintained. It is essential for Nipponkoa to streamline its business processes and improve operational efficiencies to stay competitive in the market.”

Source: A.M. Best – www.ambest.com