Best Affirms Mitsui Sumitomo ‘A+’ Ratings

January 30, 2007

A.M. Best Co. has affirmed the financial strength rating of “A+” (Superior) and the issuer credit rating of “aa” of Japan’s Mitsui Sumitomo Insurance Company Limited (MSI) with a stable outlook.

“The ratings reflect MSI’s improved risk-adjusted capitalization, consistent operating performance and efficient distribution channels,” said Best. “The ratings also reflect the company’s growing overseas and life business operations.

“MSI has maintained a strong capital position over the past five years. The company’s risk-adjusted capitalization, as measured by Best Capital Adequacy Ratio (BCAR), improved in fiscal year 2005. This was mainly attributed to the increase in unrealized capital gains, price fluctuation reserves and a rise in earned income. The local solvency ratio also showed a similar improvement trend, from 1,026 percent in fiscal year 2004 to 1,122.7 percent as of September 30, 2006. A.M. Best expects that MSI’s capitalization will remain stable for the next three years.”

Best also noted that “MSI has achieved a stable operating performance over the past five years, except in fiscal year 2004 when it experienced an extraordinary level of natural disaster claims payments. In fiscal year 2005, MSI recorded an improvement in its loss ratio due to the decrease in catastrophic claims payments. The expense ratio has also improved, signifying the improvement in MSI’s operating efficiency due to its size advantage. The adjusted return on equity (ROE) and return on assets (ROA) both remained stable, recorded at 3 percent and 0.9 percent, respectively, in fiscal year 2005.

“MSI has formed strong business alliances and co-operation strategies with life insurance companies, credit card companies and banks. It is also a positive initiative for MSI to reconsolidate and build a strong sales force of 50,000 agents with high productivity and sales capacity by fiscal year 2007. A.M. Best believes that this reconsolidation scheme will help the company to stay competitive and strengthen its distribution channels.

“MSI is aggressive in expanding its overseas operations, especially in the Asian markets. The company has one of the largest overseas networks among the Japanese non-life insurance companies. In fiscal year 2005, MSI’s overseas premiums represented 13 percent of its total consolidated net premiums written (NPW), and it aims to increase the overseas portion to 20 percent by fiscal year 2010. The life operations handled by its two major subsidiaries, MS Kirameki Life (focusing on first sector products) and MS MetLife Insurance (focusing on personal annuity products), have also achieved a substantial business growth with increasing profits over the past three years.”

However Best indicated that the “adverse impact on MSI’s market profile due to the Financial Services Agency’s (FSA) business suspension order and high equity exposure,” are considered as “partially offsetting these positive rating factors.”

Best explained that “MSI’s market competition might be deteriorated due to the business suspension order issued by the FSA in June 2006 regarding its non-payment claims in relation to third sector products. The company will likely face a downward pressure in respect of its overall earnings in fiscal year 2006 due to the nonpayment claims problems, as well as the impact of damages resulting from Typhoon 13 that hit Japan in September 2006.

“Despite its continuous effort to reduce its equity holdings, MSI’s equity exposure remains high. This high equity exposure might exert pressure on the stability of the company’s capitalization level.”

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