Typhoon Hagibis is likely to be an earnings event for Japan's three main non-life insurance groups, MS&AD, Sompo and Tokio Marine, with no material effects on capital and no rating implications, Fitch Ratings says.
We expect the companies' net losses after reinsurance and catastrophe reserve releases to be limited in relation to their overall earnings, based on our preliminary analysis following initial industry loss estimates. We do not expect catastrophe reserve releases to materially weaken the insurers' capital as measured by Fitch's Prism factor-based capital model.
Hagibis, which made landfall in central Japan on 12 October, was classified as 'violent', the highest category on Japan's typhoon scale. It caused widespread flooding, with tens of thousands of homes damaged or destroyed, and many businesses disrupted. Catastrophe risk modelling firm AIR Worldwide estimates that insured losses from Hagibis will be between JPY865 billion and JPY1.73 trillion (USD8 billion and USD16 billion). Insurers are likely to announce their initial loss estimates in mid-November.
We expect that well over half of the insured losses will be covered by the reinsurance sector or partly borne by cooperatives such as Zenkyoren, which provides insurance to Japan's agriculture sector. Primary insurers are therefore likely to bear less than half of the total insured losses. We expect them to cover these mostly by releases from their catastrophe reserves, limiting the implications for reported earnings. The depletion of catastrophe reserves will be negative for insurers' balance sheet strength but we do not expect a material effect on their Prism scores.
MS&AD, Sompo and Tokio Marine had catastrophe reserves totalling a combined JPY2.4 billion at end-June 2019, and the profitability of their non-catastrophe business gives an extra buffer to absorb catastrophe losses or replenish reserves. The three groups combined have reported annual recurring profits consistently around JPY800 billion in recent years from their domestic non-life business, despite record weather-related losses of JPY1.6 trillion in the underwriting year ending March 2019 (FYE19). MS&AD (Insurer Financial Strength (IFS) Rating: A+/Stable), Sompo (A+/Stable) and Tokio Marine (AA-/Stable) represent about 85% of Japan's non-life sector by premium income.
Japanese non-life insurers are expanding their reinsurance cover and facing higher reinsurance premium rates as a consequence of more frequent weather-related catastrophe losses. Weather-related events in FYE19 accounted for three of the ten largest windstorm and flood losses in Japan's history, and Hagibis follows Typhoon Faxai in September, for which AIR Worldwide estimates insured losses of between JPY340 billion and JPY740 billion. We expect insurers to increase their windstorm and flood loss reinsurance cover at the next round of reinsurance programme renewals in April 2020 given the recent high losses.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.