Japan's insurers absorb record cat losses

The three major Japanese non-life insurance groups - Tokio Marine Holdings, MS&AD Insurance Group Holdings and Sompo Holdings – have incurred their biggest annual catastrophe loss on record in the first half of the financial year ending March 2019 (FYE19), according to Fitch Ratings.

Between April and September 2018, the insurers incurred a combined gross loss of more than ¥1 trillion ($8.8 billion) from domestic natural disasters such as typhoon Jebi, typhoon Trami and flooding in July, the biggest annual catastrophe loss on record, Fitch noted.

About half of the total gross insured losses were covered by reinsurance arrangements, and part of the remainder will be offset by the release of catastrophe reserves, mitigating the negative impact on their 2019 FYE19, the agency noted.

Japan's top-four non-life insurers under the three non-life groups raised their combined ratio estimate by 9 percentage points for FYE19 due to the weather-related loss events.

The FYE19 average combined ratio forecast (earned-to-incurred basis, excluding compulsory auto liability insurance and residential earthquake insurance) deteriorated to 102 percent from their initial forecast of 93 percent. Japanese non-life insurers plan to raise premiums on their fire business plans in 2019 due to the higher losses from the increase in natural disasters in recent years. However, Fitch believes the additional premiums will be necessary to offset the impact of other negative factors such as the consumption tax hike scheduled for 2019. Fire business lines account for only 13 percent of the non-life insurers' net premiums written but have been a drag on their overall performance, the agency noted.

Japanese non-life insurers' domestic catastrophe exposure remains one of their biggest risks and sources of volatility, although their diversified businesses may temper the negative impact on earnings, Fitch noted.

Despite the weather-related losses, two out of three non-life groups have maintained their FYE19 full-year net profit forecasts, partly helped by their overseas business. The three non-life groups have diversified their risks by expanding their reinsurance coverage, as well as their domestic life insurance and overseas businesses. The three non-life groups continue to boost their overseas contribution and will raise it to 40 percent-50 percent of their respective earnings in the medium term.

The release of the catastrophe reserves will reduce the non-life insurers' Fitch-calculated adjusted equity although the agency does not think the move will undermine the financial soundness of the companies. Fitch thinks it will take some time to replenish the catastrophe reserves, but some insurers already have plans to make additional provision for the reserves. Post-tax catastrophe reserves accounted for about 17 percent of each insurance group's adjusted equity at end-March 2018.

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