A.M. Best Affirms Rating of Sompo Japan Inc.

August 7, 2003

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) of Sompo Japan Insurance Inc., Japan. The outlook is negative.

The rating reflects Sompo Japan’s deteriorated risk-adjusted capitalization, vulnerability to the weak financial market, high domestic catastrophe exposure and intensified competition in the Japanese non-life insurance market. A.M. Best expects that these factors will continue to exert downward pressure on the rating in the near future.

Sompo Japan’s risk-adjusted capital deteriorated in fiscal year 2002, mainly driven by its exposure to the domestic equity market. The company’s local solvency ratio declined from 814 percent in fiscal year 2001 to 775 percent in fiscal year 2002. The Best’s Capital Adequacy Ratio (BCAR), which is A.M. Best’s risk-adjusted measure, also trended in the same direction. Recovery in risk-adjusted capital will continue to hinge upon the performance of Japan’s equity market.

Sompo Japan’s exposure to domestic equities is exacerbated by its cross-holding with the Mizuho Financial Group. Although the recent rally in the broader stock market has had a positive impact on capitalization, the volatility caused by equity valuations is of concern, particularly given the prolonged economic downturn in Japan.

The company’s capacity to withstand natural perils has also weakened, in view of the high occurrence of earthquakes, wind and hailstorms in Japan. Sompo Japan’s liability from Fortress Re, which was inherited from Nissan Fire, further adds to the strain on surplus.

The intensive competition in the Japanese non-life insurance market is another negative factor. Competition has intensified due to deregulation of the industry, liberalization of the financial services industry in general and entry of foreign companies and companies from other industries.

Offsetting these negative factors are the operational synergies arising from the merger of Yasuda Fire and Nissan Fire, excellent distribution capabilities and the company’s stable underwriting performance.

Through the merger of Yasuda Fire and Nissan Fire in 2002, Sompo Japan has kept its position as the third-largest insurer in Japan. This superior presence gives an advantage to the company, allowing easier access to the capital market.

The business ties with Dai-Ichi Life and financial services companies of the Mizuho Financial Group have strengthened Sompo Japan’s distribution capabilities. Additionally, the company has alliances with Credit Saison, Tokyo Gas and Nissan Motors. Through these channels, Sompo Japan’s premium has shown strong growth.

The company’s underwriting performance is stable despite intensified competition in the market. Excluding the impact from the losses from the Fortress Re event, almost all lines of business have shown improvements.

Also, the company has kept its loss expense and operating expense low, enhancing operational efficiency.

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