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Rating Action:

Moody's affirms A1 IFSR of Aioi Nissay and Mitsui Sumitomo; outlook stable

18 February 2019

Tokyo , February 18, 2019 – Moody's Japan K.K. has affirmed the A1 insurance financial strength rating (IFSR) of Aioi Nissay Dowa Insurance Company, Limited (ADI) and Mitsui Sumitomo Insurance Company, Limited (MSI).

Moody's has also affirmed the A1 long-term issuer rating and the A3 (hyb) subordinated bond rating of MSI.

The ratings outlook remains stable.

Moody's considers that ADI and MSI have become increasingly integrated under the same holding company, MS&AD Insurance Group Holdings, Inc. (MS&AD) since 2010, and MS&AD manages its group-wide capital centrally, with a high degree of fungibility between ADI and MSI. Moody's therefore considers ADI and MSI a single analytic unit and the IFSRs of ADI and MSI are aligned.

Moody's reference to MS&AD below represents the combined operations of ADI and MSI on a consolidated basis, including the majority of MS&AD's property and casualty (P&C) insurance business both in Japan and overseas.

RATINGS RATIONALE

The affirmation of ADI and MSI's A1 IFSR reflects MS&AD's very strong domestic market position and brand, strong capitalization, and low product risk, especially in the company's domestic portfolio.

These strengths are partially offset by the MS&AD's large exposure to high-risk assets, mainly domestic equities. The company also has considerable exposure to gross natural catastrophe risk, although its reinsurance arrangements mitigate this factor.

MS&AD has a leading market position and a very strong brand in Japan, with the largest domestic market share among its P&C insurance group peers. MS&AD's relative market share of net premiums written (NPW) is around 2.5x that of an average-sized P&C insurer in Japan, based on the aggregated domestic NPW of ADI (non-consolidated) and MSI (non-consolidated) for the fiscal year ended March 2018 (fiscal 2017).

MS&AD's capitalization is strong. Its gross underwriting leverage was very low at 1.7x as of the end of March 2018 on an ADI and MSI combined basis.

At the group level, MS&AD's economic solvency ratio (ESR) remained high at 202% as of the end of 2018, only slightly lower than 212% six months earlier, despite large domestic natural catastrophe losses during July-September 2018, and lower unrealized gains from the drop in the stock market towards the end 2018.

Because MS&AD's current ESR level is well positioned in its target range of 180%-220%, Moody's expects the company will continue to put its capital to use efficiently through a combination of shareholder returns and potential mergers and acquisitions. That said, Moody's also expects that it will be prudent in its capital management and will maintain a strong level of capitalization.

MS&AD faces low product risk. Based on NPW, more than half of its domestic product portfolio — excluding compulsory auto liability and household earthquake insurance — consists of voluntary auto insurance, which is short-tailed and granular.

Japan suffered multiple large domestic natural catastrophes in fiscal 2018, such as heavy rainfall in western Japan in July 2018, as well as typhoons Jebi and Trami in September 2018.

The costs of the extensive associated property and casualty damage will hurt MS&AD's earnings, although Moody's expects that its domestic profit will still be solid in fiscal 2018, because the gross catastrophe losses would be largely covered by reinsurance, given that ADI and MSI have comprehensive reinsurance programs.

MS&AD holds significant amounts of high-risk assets, especially domestic equities. This situation exposes the company's capitalization and profitability to volatility in Japan's stock market.

Nonetheless, the company has been reducing its holdings of the domestic equities of its corporate customers, and will likely continue to reduce these holdings by JPY500 billion — on a market value basis — over fiscal 2017-21. As a result, its holdings of high-risk assets will likely decrease gradually, unless the market value of the remaining stock rises significantly.

MS&AD's geographic diversification is improving because it has been expanding globally. The company's share of NPW from its overseas business significantly increased to around 26% in fiscal 2017 from 15% in fiscal 2015 before MS Amlin plc's (Amlin, its main insurance operating subsidiary, MS Amlin AG, financial strength rating A1 stable) NPW is consolidated.

Nonetheless, since the acquisition of Amlin, its profitability has been weak and has not yet contributed significantly to the MS&AD group's overall profit, due to the natural catastrophes and the stagnant performance of its non-catastrophe lines of business. In response to underwriting challenges and specific instances of underperformance, Amlin has taken remedial, re-rate and re-underwriting actions on certain lines of business.

Moody's expects Amlin's profitability to gradually improve in the medium term, driven by those actions. However, the disruption from inflows of alternative capital, tepid reinsurance demand, changing buyer behavior, and low investment returns will remain headwinds.

In addition, while Amlin is increasing its portion of non-catastrophe lines of business, the company still has high exposure to natural catastrophe perils, which is one of the company's key credit challenges.

The stable outlook reflects Moody's expectation that MS&AD will maintain its very strong market position and brand, strong capitalization and low product risk. Moody's also does not expect the company's asset quality to deteriorate significantly or its natural catastrophe risk exposure to increase significantly.

RATING DRIVERS

Because ADI and MSI's IFSRs of A1 are at the same rating level as that of Japanese Government Bonds, an upgrade of the IFSRs are unlikely.

Nevertheless, if MS&AD continues to increase its geographic diversification, in terms of both revenue and earnings, and establishes a good track record in managing its overseas business, Moody's could upgrade its ratings if there is: (1) an increase in return on capital (ROC) to above 8% on a sustained basis, (2) a decline in high-risk assets to less than 50% of shareholders' equity on a sustained basis, and (3) a decline in the expense ratio to less than 30% on a sustained basis.

Moody's could downgrade the ratings if: (1) MS&AD's profitability significantly deteriorates, with ROC consistently below 2%, (2) its high-risk assets increase to above 150% of shareholders' equity, (3) its capital suffers significant erosion, due to losses from natural catastrophes or investments, and its gross underwriting leverage rises above 4.0x, and/or (4) Moody's downgrades Japan's sovereign rating.

The principal methodology used in these ratings was Property and Casualty Insurers (Japanese) published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Aioi Nissay Dowa Insurance Company, Limited and Mitsui Sumitomo Insurance Company, Limited, headquartered in Tokyo, operate under MS&AD Insurance Group Holdings, Inc. The aggregate net premiums written of ADI and MSI amounted to JPY3.7 trillion in fiscal 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Soichiro Makimoto
VP-Senior Analyst
Financial Institutions Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo
Japan
JOURNALISTS : 81 3 5408 4110
Client Service : 81 3 5408 4100

Sally Yim
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Releasing Office :
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS : 81 3 5408 4110
Client Service : 81 3 5408 4100

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