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Japan Credit Spotlight: Shareholder Demand To Restrict Improvement For Property/Casualty Insurers

Japan Credit Spotlight: Shareholder Demand To Restrict Improvement For Property/Casualty Insurers

(Editor's Note: This article is part of the "Japan Credit Spotlight" series, which discusses major credit trends for issuers and structured finance products in the country.)

Main Risks

Equity risk and domestic natural disaster risk continue to be the main risk factors for the country's three major property/casualty (P/C) insurance groups.  Equity risk remains a major risk, even though the three groups have declared that they will sell ¥100 billion worth of equity annually.

In our view, domestic natural disaster risk, especially with regard to floods and storms, will not increase significantly, as it is managed through reinsurance cover and other measures. However, it is likely that an increase in reinsurance costs for natural disaster risk and the disbursement of reinstatement premiums will negatively affect profitability. This is because the total amount claimed for storm and flood damage reached record levels in fiscal 2018 (see chart 1) and it is likely that the damage caused by Typhoon No.15, which hit Japan in September, will result in a significant amount of claims.

Increasing pressure from shareholders for greater dividend returns will curtail any improvement in capital levels, while the maintenance of economic solvency ratios (ESRs) through the issuance of the subordinated bonds will restrain improvement in capital quality.  Major P/C groups have maintained high levels of shareholder returns, despite decreasing sources of retained earnings due to natural disasters in Japan and abroad. This is because they have been under increased pressure from shareholders regarding capital efficiency. Thus, we believe that total shareholder returns exceeded sources of retained earnings in fiscal 2018 (see chart 2).

Several overseas mergers and acquisitions (M&A) have been carried out in recent years as Japan's P/C groups have pursued growth and geographic diversification. In some cases, ESRs have come under downward pressure as a result of goodwill recognized through acquisitions. In such instances, companies have maintained their ESR by issuing subordinated debt with a view to maintaining capital efficiency.


In our view, a significant improvement in the creditworthiness of Japan's major P/C insurance groups is unlikely. As listed companies, they are constantly under pressure from shareholders for growth and better capital efficiency. As a result, they need to strike a delicate balance between ESR, return on equity, and financial leverage--for example, by returning excess capital and issuing subordinated debt to mitigate the impact of M&A on ESRs.

To sustain growth while also improving capital efficiency, major P/C groups have taken on domestic non-life risk and life insurance risk, as well as foreign insurance risks. At the same time, they have reduced their amounts of domestic equity risk since it is less capital efficient. We expect the groups to continue taking on foreign insurance risk in particular. In theory, greater geographic and business diversification will alleviate the increase in total risk on a group basis resulting from M&A. However, our assumptions regarding the benefits of diversification within our capital assessment are more conservative than those of P/C groups. Hence, the groups' ESR levels and our views on their creditworthiness are not always commensurate.

Chart 1


Chart 2


This report does not constitute a rating action.

Primary Credit Analyst:Eiji Kubo, Tokyo (81) 3-4550-8750;
Secondary Contact:Toshiko Sekine, Tokyo (81) 3-4550-8720;

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