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Rating Action:

Moody's affirms Aa3 IFSR of Tokio Marine; outlook stable

 The document has been translated in other languages

19 March 2019

Tokyo , March 19, 2019 Moody's Japan K.K. has affirmed the Aa3 insurance financial strength rating (IFSR) of Tokio Marine & Nichido Fire Insurance Co., Ltd. (TMNF).

The outlook remains stable.

RATINGS RATIONALE

The affirmation of TMNF's Aa3 IFSR reflects its very strong market position, brand and distribution, very strong capitalization, and growing business and geographic diversification through a series of acquisitions and organic growth.

These strengths are partially offset by TMNF's large exposure to high-risk assets. The company also has considerable exposure to gross natural catastrophe risk, although its comprehensive reinsurance arrangements partially mitigate this risk.

TMNF has a leading market position and a very strong brand in Japan, as the largest P&C insurer in Japan in terms of consolidated net premiums written (NPW) in the fiscal year ended March 2018 (fiscal 2017). The insurer's domestic relative market share (measured as the company's net premiums written relative to that of an average-sized company in the industry) was 2.0x that of average-sized P&C insurers in Japan for fiscal 2017.

TMNF's capital adequacy is very strong, as measured by its gross underwriting leverage of 1.9x as of the end of March 2018. The Economic Solvency Ratio (ESR) of Tokio Marine Holdings, Inc. (TMHD, or the group) – the parent company of TMNF -- remained high at 197% as of the end of September 2018, and was evaluated at a very conservative confidence level (99.95%).

In addition, this level is almost unchanged from six months earlier, despite large domestic natural catastrophe losses during July to September 2018.

TMHD's ESR is close to the top of its target range; therefore, Moody's expects TMHD to use capital efficiently through a combination of shareholder returns and potential mergers and acquisitions. However, Moody's also expects the group to be prudent in its capital management of TMNF so as to maintain a very strong level of capitalization.

TMNF has significant geographic diversification outside of Japan. We estimate its overseas insurance operations contributed around half of overall net premiums in fiscal 2017.

It also has a global footprint, and has expanded its overseas business mainly through the acquisitions of large US companies, the largest of which in terms of NPW in 2018 will likely be HCC Insurance Holdings, Inc. (HCC). TMNF sells specialty insurance products through its US subsidiaries, including HCC.

To continue its premium growth and diversify its product offerings, TMNF is increasing its sales of specialty insurance. Nonetheless, these products also introduce new risks to its insurance portfolio, though its overseas subsidiaries can transfer its expertise on these products to the domestic market.

TMNF holds significant amounts of high risk assets, mainly domestic equities. While it has been steadily reducing its holdings of domestic equities on a book-value basis, the ratio of high-risk assets to shareholders' equity is still high relative to its similarly-rated global peers.

In addition, one of its US subsidiaries, Delphi Financial Group, Inc. (its main insurance operating subsidiary Reliance Standard Life Insurance Company, IFSR A2 stable), holds mezzanine loans for commercial real estate and CLOs, which we consider are less liquid than traditional fixed-income type assets.

Japan suffered multiple large 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 related catastrophe losses will hurt TMNF's earnings, although Moody's expects that its profit will still be solid in fiscal 2018, because (1) part of the gross catastrophe losses would be covered by the insurer's reinsurance programs, (2) the fundamental profitability in its domestic business -- except for one-off catastrophe losses -- is strong, and (3) profits from its overseas business will support overall profits.

TMNF's Aa3 IFSR is one notch higher than Japan's sovereign rating of A1. This considers the insurer's manageable exposure to Japanese government bonds (JGBs) and significant contribution of revenue and profits from its overseas business, combined with its strong standalone profile as discussed above.

The stable outlook reflects Moody's expectation that TMNF will maintain its very strong market position, very strong capital adequacy, and good product and geographic diversification over the next 12-18 months. 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 TMNF's IFSR of Aa3 is already higher than that of JGBs, an upgrade of the IFSR is unlikely.

Nevertheless, Moody's would consider upgrading TMNF if it shows the following: (1) a further significant increase in its geographic diversification on a consistent basis, (2) a decline in high-risk assets to substantially less than 50% of shareholders' equity on a consistent basis, and (3) an increase in return on capital (ROC) to above 8% on a consistent basis.

Moody's could downgrade the ratings if: (1) TMNF's holdings of JGBs increases significantly and/or its geographic diversification decreases materially, (2) its high-risk assets increases to above 200% of shareholders' equity, (3) its capital suffers significant erosion, due to losses from natural catastrophes or investments, and its gross underwriting leverage rises above 3.0x, 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.

Tokio Marine & Nichido Fire Insurance Co., Ltd., headquartered in Tokyo, is Japan's largest P&C insurance company, with consolidated net premiums written of JPY3.4 trillion for fiscal year ended March 2018. The insurer provides auto, fire and personal accident insurance, and is a subsidiary of Tokio Marine Holdings, Inc.

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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