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Stock market volatility still biggest challenge for Japan re/insurers: AM Best

3rd July 2020 - Author: Matt Sheehan

COVID-19 induced volatility in the stock market continues to pose the biggest challenge to the balance sheets of Japan’s major non-life re/insurers, according to analysts at AM Best.

japanese-yenThe rating agency noted that high common stock leverage among each of Japan’s re/insurers has brought systematic equity price risk into greater consideration.

The threat to balance sheets is particularly pronounced given the potential losses to the asset valuations that companies may face during global stock market routs, it added.

The top four domestic non-life insurers – Aioi Nissay Dowa Insurance, Mitsui Sumitomo Insurance, Sompo Japan Insurance, and Tokio Marine & Nichido Fire Insurance – all reported lower valuations of their stock holdings during first-quarter 2020.

This has led to considerable pressure on the fair value of their available for-sale securities and adjusted net assets in absolute terms.

Nevertheless, AM Best found that approximately 50% of the main four insurers’ collective equity portfolio is allocated to foreign stocks, which are mostly long-term equity holdings of affiliated insurance subsidiaries.

As a result, any changes owing to the day-to-day fluctuations in global stock markets generally have a limited causal relationship with the valuations of these foreign equities.

So while domestic common stock exposure remains a material risk factor on the balance sheets of major Japanese non-life insurers, AM Best believes that systematic equity price risk is unlikely to result in material changes to major non-life insurers’ balance sheet strength assessments.

This is due to Japanese re/insurers’ very strong risk-adjusted capital positions and manageable exposure to domestic common equities.

In addition, as the companies continue to gradually dispose of some of their strategic domestic holdings while continually expanding their overseas business portfolios, the capital strain that stems from domestic common equity exposure will recede gradually over time.

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