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Japanese fundamentals stable despite share plunge: AM Best

27th March 2020 - Author: Matt Sheehan

AM Best believes that the credit fundamentals of most re/insurers have not changed dramatically despite the coronavirus (COVID-19) outbreak and the Russia-Saudi Arabia oil dispute causing share prices to plunge by 30-40%.

JapanWhile these and other factors continue to present major challenges for the sector, analysts believe that most market players remain well-positioned to endure the volatile investment climate.

Insurance companies in Japan generally invest policyholders’ premiums and surplus in a portfolio of marketable assets, which include domestic and foreign equities, in addition to domestic and foreign bonds.

As such, any capital market decline is likely to result in a subsequent decrease in the market values of these securities, which may lead to a negative impact on insurers’ financial strength and investment performance.

In addition, heightened uncertainty in the global economy may contribute to interest rate and exchange rate volatility, as well as an increase in defaults in fixed income and loan portfolios, and could also affect operating results.

But in AM Best’s view, the recent share price movements of the major Japanese insurers do not have much in relation to the business fundamentals, and instead are driven by sensitivity to equity price risk.

Most large insurers in the country have generally high common stock leverage, which subjects adjusted capital to considerable equity price risk exposure.

Additionally, while Japan has seen an economic slowdown and reduced trading activity due to COVID-19, there has not been much deterioration in the underlying profits of both non-life and life insurance companies.

AM Best further noted that most domestic insurers maintain fairly conservative capital adequacy ratios and financial leverage ratios that should enable them to withstand adverse market conditions.

With global financial markets expected to remain volatile over the near to medium term, AM Best’s view of Japanese insurers will largely depend on the development of oil prices, as well as the evolving situation of the COVID-19 pandemic, particularly in Europe and the US.

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