Tokio Marine, Sompo, MS&AD remain profitable despite record 2018 nat cat losses

Japans three major insurance groups Tokio Marine Holdings (TMHD), Sompo Holdings and MS&AD Insurance Group Holdings are expected to remain profitable in fiscal 2018 (April-March) despite record high domestic wind and flood catastrophe losses, according to Moody’s.

Typhoon Jebi made landfall in Western Japan on Sept. 4, 2018 with 165 kph (100 mph) winds – and prompted widespread wind and flood damage to many prefectures.

Claims from Jebi have so far reached ¥585.10 billion ($5.17 billion), surpassing claims of Typhoon Mireille, the most expensive typhoon in Japan so far with ¥568.0 billion, according to the General Insurance Association of Japan (GIAJ).

The country has also been hit by several days of record-breaking rainfall between July 4 and 8, which led to widespread inland flooding in 11 prefectures across western and central Japan.

The rains were dubbed the deadliest natural catastrophe to hit the country since the 2011 Tohoku earthquake and the worst flood event since 1982.

Numerous rivers and streams burst their banks and many landslides have been reported. In addition to major damage to buildings and infrastructure there has been a considerable business interruption. At least 180 lives have been lost.

But Japan’s three major property and casualty (P&C) insurers are expected to be able to absorb the record high domestic wind and flood catastrophe losses, according to Moody’s said.

"Based on financial performance in the first half of fiscal 2018, the three insurance groups are likely to remain profitable for the full fiscal year, even after the exclusion of the accounting effect of the reversal of catastrophe reserves and gains on the sales of domestic stocks, which will lead to internal capital generation," said Soichiro Makimoto, a Moody's senior analyst.

"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," added Makimoto.

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, the agency 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, Moody’s noted. Loss ratios for the first half of fiscal 2018 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 fiscal 2018 over fiscal 2017 when they suffered significant losses from North American hurricanes.

However, profit contributions from overseas are mixed, the agency said. Moody's expects the overseas business to contribute around 50 percent of TMHD's consolidated net profit in fiscal 2018, 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 percent for MS&AD and 10 percent for Sompo HD.

Despite record high domestic wind and flood catastrophe losses, capitalization for the top three P&C insurance groups in Japan by net premiums remains strong, according to the agency.

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