Best Affirms Toa Re ‘A+’ (Superior) Ratings

August 20, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of A+ (Superior) of Japan’s Toa Reinsurance Company Limited, with a negative outlook.

“The negative outlook reflects Toa Re’s weakened capitalization, high exposure to Japan’s equity market and disappointing operating results in a difficult operating environment,” said Best. “In the near term, A.M. Best expects that the volatility in Japanese equities will continue to be a destabilizing factor.”

The rating agency indicated that according to its “Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis,” Toa Re’s balance sheet strength has weakened as a result of significant unrealized capital losses. Best noted that “The company’s local solvency ratio also declined from 575.3% in fiscal year 2001 to 562.7% in fiscal year 2002, and warned that “although capitalization remains secure at the current level, any further deterioration in these two risk-adjusted measures will likely trigger additional rating actions by A.M. Best.”

One reason Best cited is the fact that “Toa Re’s investment portfolio is heavily weighted towards Japanese equities, which accounted for 36% of non-consolidated invested assets as of March 31, 2003. Since these shares have been accumulated at relatively low average costs, unrealized capital gains represent a sizable portion of reported capital and surplus. Nonetheless, the sharp decline in equity valuations has eroded much of this cushion, exerting downward pressure on risk-adjusted capital.

“After unrealized capital losses are accounted for, overall profitability is much weaker than the level indicated by the reported income statement. The company’s lackluster financial performance is driven by its poor investment results, as well as its unprofitable, albeit improving, underwriting business. On a non-consolidated basis, reported return on adjusted equity and return on assets averaged 1.2% and 0.6%, respectively, from fiscal year 1998 to fiscal year 2002.”

The negative factors are to some extent offset by “Toa Re’s strong position in the Japanese reinsurance market, conservative premium leverage and adequate retrocession protection against catastrophic events,” said Best. “As Japan’s only indigenous professional reinsurer underwriting both life and non-life reinsurance business, Toa Re derives tremendous benefits from its close ties with domestic insurers, who are also shareholders. The growth in the domestic reinsurance market will likely be limited by the continuing consolidation at the direct market level.

“Through its subsidiary, Toa Re America, the company has also made valuable inroads in the global reinsurance marketplace. In terms of gross premium written, Toa Re ranks 23rd-largest in the world among groups predominantly writing reinsurance.”

The report also added “Toa Re’s conservative net premium leverage ratio of 0.7 times compares favorably to other international reinsurers. The company’s catastrophe covers for earthquakes and windstorms, which are underwritten by a panel of secure-rated retrocessionnaires, also serve to stabilize underwriting results. This protection is critical, given the high occurrence of major natural perils in Japan. “

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