A.M. Best Lowers Sompo (U.S.) Ratings to ‘A’

December 23, 2004

A.M. Best Co. announced that it has downgraded the financial strength rating to “A” (Excellent) from “A+” (Superior) of New York-based Sompo Japan Insurance Company of America (SJA), and has maintained a negative outlook on the rating.

Best explained that the downgrade reflects its decision to remove SJA’s core status. “Given the current environment within the industry, A.M. Best has refined its view of core as outlined in its updated methodology on rating members of insurance groups. (See Rating Members of Insurance Groups at: http://www.ambest.com/ratings/membergroups.pdf.), ” said the announcement.

“As a result, the rating of SJA’s parent company, Sompo Japan Insurance Company (SJ) (Tokyo, Japan), is no longer assigned to SJA,” it continued. However, Best noted that it now “considers SJA to be a strategic subsidiary of SJ, and rating uplift is applied to SJA’s stand-alone rating.”

Best also indicated that the downgrade “reflects the company’s poor underwriting results over the past five years which led to a significant erosion of surplus. SJA’s high loss ratios stemmed primarily from a severely under-priced book of U.S. third-party business, which SJA stopped writing in 2001. These accounts were not related to its parent company’s multinational clients.”

The report stressed that in the future “SJA will only write the business of its parent’s clients who maintain operations in the United States. While SJA’s operating performance remains weak with above-average losses projected for 2005, A.M. Best recognizes management’s efforts to reverse this trend through expense reduction strategies, enhanced underwriting discipline and continued parental support.

“SJA maintains an ‘A’ (Excellent) rating due to its status as a strategic subsidiary of Sompo Japan Insurance Company (SJ) (Tokyo, Japan). SJA’s primary directive is to provide top quality service to its parent’s clients who operate in the United States. This arrangement is essential from SJ’s perspective, as these clients account for a significant portion of the group’s consolidated earnings. The rating also reflects SJA’s excellent stand-alone capital position subsequent to a $100 million capital injection provided by SJ in November, 2004.”

In conclusion Best said it “recognizes the above-mentioned improvements to SJA’s capitalization and risk selection processes, but remains concerned with SJA’s ability to improve its underwriting performance during a period of softening market conditions.”

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