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Rating Action:

Moody's affirms A1 IFSRs of Aioi Nissay Dowa and Mitsui Sumitomo Insurance; outlook stable

 The document has been translated in other languages

18 February 2021


Tokyo , February 18, 2021 -- Moody's Japan K.K. has affirmed the A1 insurance financial strength ratings (IFSR) of Aioi Nissay Dowa Insurance Company, Limited (ADI) and Mitsui Sumitomo Insurance Company, Limited (MSI).

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

The outlook remains stable.

RATINGS RATIONALE

ADI and MSI have been integrated under the same holding company, MS&AD Insurance Group Holdings, Inc. (MS&AD) and MS&AD manages its group-wide capital centrally, with a high degree of fungibility between ADI and MSI. 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.

The affirmation of ADI and MSI's ratings reflects the insurers' strong capitalization, their very strong domestic market position, and low product risk in its domestic insurance business. We also expect them to maintain a good level of overall profitability.

These strengths are partially offset by (1) MS&AD's relatively large exposure to equities compared with similarly rated global peers, (2) a significant exposure to gross natural catastrophe risk, and (3) weak earnings at MS Amlin AG (IFSR A1 stable) and Lloyd's Syndicate 2001 (IFSR A1 stable), collectively referred to as the "MS Amlin entities".

We expect MS&AD to maintain strong capitalization. Its economic solvency ratio (ESR) at the group level was strong at 186% at the end of March 2020 even amid a stressed capital market environment in the onset of the coronavirus pandemic and several large domestic natural catastrophes in recent years, and further strengthened to 212% as of the end of December 2020, driven by increases in domestic stock prices and interest rates from nine months earlier.

Because MS&AD's current ESR is well positioned in its target range of 180%-220%, Moody's expects the insurer will improve capital efficiency through a combination of shareholder returns, investing in riskier assets to boost yields, and potential mergers and acquisitions. That said, Moody's also expects that the insurer will be prudent in its capital management to maintain a strong capitalization within its target range.

MS&AD will maintain a strong market position with very high market share. The insurer is one of the largest property and casualty (P&C) insurance groups in Japan and has good brand recognition. The group's relative market share of net premiums written (NPW) is around 2.6x 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 2020 (fiscal 2019).

The coronavirus pandemic has not significantly affected MS&AD's overall premium and domestic profitability. Despite the stagnant global economy, and social distancing measures, the company maintained its net premium income, excluding compulsory auto liability and household earthquake insurance, during the first three quarters of fiscal 2020 compared with the same period a year earlier. The decline in overseas premiums was offset by the increase in domestic premiums.

Additionally, the resilient underwriting profit base of MS&AD's domestic business has mitigated the negative credit impact of coronavirus-related incurred losses posted by the MS Amlin entities, which amounted to JPY38 billion during the first three quarters of fiscal 2020. MS&AD's investment income will decline in fiscal 2020 from a year earlier, with most of the decline coming from the decline in gain on sales of domestic policy-holding equities.

In addition, MS&AD will continue to have low product risk, given the short-tail and granular-risk nature of its domestic insurance portfolios, with more than half of its domestic product portfolio — excluding compulsory auto liability and household earthquake insurance — consists of voluntary auto insurance based on NPW.

On the other hand, MS&AD still holds a large amount of domestic equities compared with its similarly rated global peers, despite the insurer's continuous efforts to reduce its holdings. This exposes the group's capitalization and profitability to changes in the domestic equity market and corporates' earnings.

MS&AD has significant exposure to gross natural catastrophe risk from typhoons and floods. That said, its reinsurance program significantly mitigates the gross loss, evident by the fact that the insurer remained profitable in fiscal 2018-19 during which domestic catastrophe losses were at a record high.

MS Amlin entities' profitability has been weak since their acquisition. To improve their underwriting performance, the entities had taken remedial actions on certain lines of business, which helped turn to underwriting profit – excluding the impact of the pandemic – in the first three quarters of fiscal 2020 from underwriting loss in the same period last year. We expect the profitability of the MS Amlin entities to continue to improve.

The stable outlook reflects Moody's expectation that MS&AD will maintain its very strong market position and brand, strong capitalization, good level of profitability 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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of ADI's and MSI's A1 IFSRs is unlikely, given that they are at the same rating level as that of Japanese government bonds.

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 the insurer's ratings, provided that MS&AD (1) increases its return on capital (ROC) to above 8% on a sustained basis, (2) reduces its risky assets to less than 50% of shareholders' equity on a sustained basis, and (3) reduces its 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 its ROC consistently below 2%, (2) its risky assets increase to above 150% of shareholders' equity, (3) its capital suffers significant erosion, and/or (4) Moody's downgrades Japan's sovereign rating.

The principal methodology used in this rating was Property and Casualty Insurers Methodology (Japanese) published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187356 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Aioi Nissay Dowa Insurance Company, Limited (ADI) and Mitsui Sumitomo Insurance Company, Limited (MSI) are headquartered in Tokyo and operate under MS&AD Insurance Group Holdings, Inc. ADI's and MSI's aggregate domestic net premiums written amounted to JPY2.8 trillion in fiscal 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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, CFA
MD-Financial Institutions
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
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Tokyo, 105-6220
Japan
JOURNALISTS : 81 3 5408 4110
Client Service : 81 3 5408 4100

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