Japan:Fitch revises outlook on Mitsui Sumitomo Insurance to 'Stable'

Fitch Ratings has revised the outlook on Mitsui Sumitomo Insurance's (MSI) Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) to 'Stable' from 'Negative'. At the same time, the global credit rating agency has affirmed the IFS Rating at 'A+' (Strong), and IDR at 'A'. Fitch has simultaneously affirmed the rating on MSI's US dollar subordinated debt at 'A-'.

The 'Stable' outlook reflects Fitch's assessment that the insurer will maintain its capital adequacy and financial performance, which are more favourable than the pro forma results implied by the agency's pandemic stress test analysis in 2020, the basis for the 'Negative' outlook previously.

Fitch has revised its forecast of the impact of COVID-19, and assumed that equity markets have returned to a period of more normalised volatility. Fitch also expects MSI's insured losses from the coronavirus pandemic to remain within expectations, underpinned by resilient domestic non-life underwriting.

The affirmation of MSI's ratings reflects parent MS&AD Insurance Group's (MS&AD Group) 'Favourable' business profile, supported by a leading share of the non-life insurance market in Japan, and a well-diversified business portfolio. It also reflects the group's financial performance and capitalisation, which are in line with our expectations for its rating range.

Capital

Fitch expects MSI and MS&AD Group to maintain strong capital buffers. However, the group's capital adequacy is sensitive to stock-market performance due to a high level of strategic shareholdings, which are equivalent to 10% of MS&AD Group's total assets. The group's economic value-based capital adequacy is also affected by interest rate risks stemming from the group's domestic life business. MS&AD Group's Economic Solvency Ratio (ESR) improved to 212% by end-December 2020, from 186% at end-March 2020 and the consolidated solvency margin ratio improved to 882% by end-December 2020 from 781% at end-March 2020, on favourable market conditions.

Underwriting

Fitch expects MSI and MS&AD Group to maintain strong non-life underwriting results, which will be supported by improvement in pricing and reduction in pandemic-related losses in 2021, assuming losses from natural catastrophes remains at the historical average.

MSI expects its combined ratio, excluding compulsory auto liability insurance and residential earthquake insurance, on an earned to incurred basis to have improved to 93% by the end of the financial year to March 2021 (FY21), from 96% at FY20, helped by better pricing, lower claim costs due to reduced economic activities and smaller weather-related loss events compared with the prior year.

MSI's pandemic losses largely arose from business interruption policies through its subsidiary MS Amlin. Fitch assumed that these losses pushed up MS Amlin's combined ratio by about 10pp in 2020. Fitch estimates the impact on the combined ratio at the MSI consolidated level and MS&AD Group level was rather limited at about 4pp and 2pp respectively, in FY21.

Source: Asia insurance review