Best Affirms Toa Re ‘A+’, ‘aa’ Ratings

January 7, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of Japanese reinsurer The Toa Reinsurance Company, Limited, and has assigned an “aa-” issuer credit rating (ICR) to Toa Re. The outlook for both ratings, however, is negative.

“The rating reflects the company’s low premium leverage, strong market presence and diversified revenue sources,” said Best. “Adding to these positive factors is the improved underwriting performance in fiscal year 2003. However, the underwriting performance is expected to deteriorate in fiscal year 2004, mainly attributed to the major losses incurred by the serious typhoons in Japan in 2004.”

Best indicated that the “company maintains a low net premium leverage of 0.49 times as of fiscal year 2003. Adjusted policyholder surplus (APHS) was JPY 219 billion ($2.072 billion), which is 55 percent of total assets as of fiscal year 2003. With the recovery of the Japanese stock market, the local solvency ratio improved to 725 percent in fiscal year 2003 from 563 percent in fiscal year 2002.”

It also noted: “Toa Re maintains a preferred status with its Japanese non-life insurance clients, who are also major shareholders. The company enjoys an outstanding market presence as the only domestic professional reinsurance company in Japan.

“In recent years, the company has further diversified its portfolio into the life reinsurance market as well as overseas reinsurance markets. As of fiscal year 2003, life reinsurance represents 9 percent of the company’s gross premium and overseas reinsurance represents 19 percent of the company’s gross premium. Profitability of the company’s overseas business is on an improving trend, and life business generates a stable underwriting income for the company. In December 2003, Toa Re made further inroads into China by acquiring 10 percent of the shares of China Property & Casualty Reinsurance Company and China Life Reinsurance Company respectively.”

However, Best said that offsetting these positive rating factors is “the company’s excessive exposure to the equity markets and the consolidation of the Japanese non-life market which results in lower demand for domestic reinsurance coverage.”

It noted that the “company has 56 percent of the total assets or 102 percent of its APHS in equities as of fiscal year 2003.” As a result Best said, “this high equity risk weighs heavily on the company’s risk-based capitalization. Risk-based capitalization showed strong improvement in fiscal year 2003 as the Japanese stock market recovered, but the company is still vulnerable to market risk that hinges upon the performance of the domestic equity market.”

Best also explained that the “market consolidation of the non-life insurance industry in Japan increased the direct companies’ capacity to retain more business, which directly decreased the domestic demand for reinsurance protection. This trend is also shown in Toa Re’s domestic reinsurance premiums over the last 4 years.”

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