Best Affirms ‘A++’ Ratings of Tokio Marine & Nichido Fire Insurance

April 27, 2007

A.M. Best Co. has affirmed the financial strength rating of “A++” (Superior) and the issuer credit rating of “aa+” of Japan’s Tokio Marine & Nichido Fire Insurance Company Limited (TMNF), with a stable outlook.

The ratings reflect TMNF’s strong risk-adjusted capitalization, strengthened distribution channels and diversified income sources. The ratings also reflect the company’s comprehensive reinsurance scheme.

TMNF is the market leader in the Japanese non-life insurance industry with dominant market share of approximately 25 percent as of fiscal year 2005. The company demonstrated a superior capitalization level with strong risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s local solvency margin has consistently stood at over 1,000 percent over the past five years, except fiscal year 2004. A.M. Best believes that the company’s capitalization will remain strong over the next three years.

To cope with the potential challenges in the midst of the market deregulation in Japan, TMNF deployed numerous ways to strengthen its distribution networks. The company plans to utilize the newly established Financial Sales Promotion department (joint sales and marketing functions of life and non-life businesses) to provide one-stop shopping services for its customers. In addition, the acquisition of Nisshin Fire and Marine Insurance Company by Millea Group is also expected to strengthen the company’s retail business distribution networks.

Millea Group is active in diversifying its revenue sources, not only expanding in the domestic non-life insurance market but also diversifying its profit sources through the domestic life and global insurance markets. TMNF has been aggressively expanding in overseas markets in recent years through mergers and acquisitions. A.M. Best believes that this is a positive initiative in diversifying its earnings sources from the matured Japanese non-life market if TMNF can translate the increased revenue into additional profits.

TMNF’s catastrophe exposure is sufficiently covered by its catastrophe reserves and reinsurance scheme. The company’s catastrophe reserves are enough to cover its total probable maximum loss (PML) exposure as of fiscal year 2005.

However, Best did note that “the possible adverse impact on TMNF’s market profile due to the Financial Services Agency’s (FSA) business suspension order and potential instability of capitalization level” should be considered as offsetting factors.

“TMNF received a three-month business suspension order from the FSA regarding its non-payment claims of the third sector products in March 2007,” Best explained. “The failure to pay insurance claims reveals the potential flaws inherent in the company’s corporate governance and compliance systems, which might potentially hurt its market profile as the industry leader.”

As of fiscal year 2005, TMNF’s equity investments accounted for approximately 44 percent of its total assets. This high equity exposure could expose the company to potential instability of its capitalization level.

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