News Non-Life29 Nov 2018

Japan:P&C majors expected to post profits for FY2018 despite CAT hits

| 29 Nov 2018

Based on financial performance in the first half of fiscal 2018, three major P&C insurance groups in Japan are likely to remain profitable for the full fiscal year ending 31 March 2019 (FY2018), even after the exclusion of the accounting effect of the reversal of catastrophe reserves and gains on the sales of domestic stocks, according to Moody's Japan.

Mr Soichiro Makimoto, a Moody's vice president and senior analyst, said in a report released yesterday, "Our assessment of profitability reflects our view that the groups' sound risk management, including the use of reinsurance and the pursuit of geographic diversification, has contributed to the resilience of their profit bases."

The three P&C insurance groups referred to in the report are:

  • Tokio Marine Holdings (TMHD, its main domestic P&C insurance subsidiary is Tokio Marine & Nichido Fire Insurance [TMN]);
  • Sompo Holdings (Sompo HD, its main domestic P&C insurance subsidiary is Sompo Japan Nipponkoa Insurance [SJNK]); and
  • MS&AD Insurance Group Holdings (MS&AD, one of its main domestic P&C insurance subsidiary is Mitsui Sumitomo Insurance [MSI]).

Moody's points out that the resilience of the groups' profit bases and high economic solvency ratios will allow them to maintain strong capitalisation and support shareholder returns through share buybacks and/or dividends.

Moody's conclusions are contained in its recently released report, "Property and Casualty Insurers - Japan: MSI, SJNK and TMN — First half 2018 results show insurers weathering record catastrophe losses".

CAT risk

Downside risk for capital and profitability will come from the potential for additional severe catastrophes for the remainder of this fiscal year, the report says. Moody's estimates that the occurrence of multiple significant catastrophes so far this fiscal year has exhausted the lower layers of wind/flood catastrophe excess of loss cover for some Japanese P&C insurers.

Nevertheless, after considering their catastrophe risk management, Moody's believes the insurers are using adequate measures to reduce those risks by, for example, purchasing additional reinsurance cover in or around the same position of the exhausted layer(s).

The profitability of the three groups' P&C businesses in Japan remains strong, but is peaking. Loss ratios for the first half of FY2018 reported by MSI, SJNK, and TMN, excluding the impact of natural catastrophes, changed less than 1.5 percentage point from the same period a year earlier. Moody's expects profitability on auto insurance, the biggest profit contributor, to decline slightly due to gradually rising repair costs and lower premium rates from January 2018, driven by advisory rate revisions made by the General Insurance Rating Organization of Japan.

The three groups' earnings forecasts suggest that all of them are likely to record higher net profits from overseas in FY2018 over FY2017, when they suffered significant losses from North American hurricanes.

However, profit contributions from overseas is mixed. Moody's expects the overseas business to contribute around 50% of TMHD's consolidated net profit in FY2018, driven by organic growth of its US business, a reflection of its well-diversified profit base. On the other hand, this contribution would be around 20% for MS&AD and 10% for Sompo HD.

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