The average combined ratio of Japan's top four non-life insurers declined to 92% in the financial year ended March 2017 (FYE17) on a fall in incurred losses, which were partly helped by lower losses for domestic weather damage, says Fitch Ratings.
Insurers are projecting their combined ratios will stay at similar levels in FYE18, assuming catastrophe losses remain within their expectations.
Insurers expect net written premium (NPW) to grow by 1.4% in FYE18 on average, based on their aggregate forecasts. NPW fell 1.3% on average in FYE17, due to strong demand in the previous year ahead of a price revision in the fire insurance business.
The premium rate for voluntary auto insurance, which accounts for half of non-life insurers’ total NPW, is likely to decline from 2018. The General Insurance Rating Organization of Japan will likely cut the reference rate, as accident rates have fallen.
However, Fitch Ratings expects the major non-life insurers to be prudent in their underwriting pricing process, taking into consideration rising repair costs and the government's plan to raise the consumption tax in 2019.
All three non-life groups (Tokio Marine Holdings, Sompo Holdings and MS&AD Insurance Group) are expecting their overseas businesses to generate 30%-40% of adjusted profits in FYE18.
Sompo is expecting contribution from the newly acquired Endurance Specialty Holdings (renamed Sompo International) from FYE18, while the other two groups reported strong growth in FYE17 following acquisitions.
Fitch sees Japanese non-life insurers continuing their search for valuable M&A opportunities for future business growth and geographical diversification. Nevertheless, effective integration and prudent risk management of these acquired entities remain crucial to achieve their targets.
Non-life insurers’ average solvency margin ratio improved to 756% at FYE17 from 704% a year earlier, on the accumulation of core capital and the reduction of catastrophe risks. Some insurers continued to issue subordinated debt to strengthen their capitalisation.
In Fitch’s view, the insurers have strong financial flexibility to issue subordinated debt as their financial leverage ratios remain relatively low. Their capital adequacy ratios remain susceptible to the stock market’s performance as they have sizeable equity holdings despite an ongoing reduction process. The economic solvency ratio reported by each non-life group also improved compared to end-March 2016 on favourable market conditions.