Given the current COVID-19-driven stock market volatility, high common stock leverage among each of Japan’s major non-life insurers brings systematic equity price risk into greater consideration – according an AM Best report titled ‘Japan Non-Life: Robust Capitalisation to Weather Stock Market Volatility’.
This means that stock market volatility continues to pose the biggest challenge to the balance sheets of Japan’s major non-life insurers considering the potential losses to the asset valuations that companies may face during global stock market routs.

The report notes that the major four domestic non-life insurers – Aioi Nissay Dowa Insurance, Mitsui Sumitomo Insurance, Sompo Japan Insurance and Tokio Marine & Nichido Fire Insurance – which have relatively high common stock leverage, reported lower valuations of their stock holdings during the first-quarter of 2020.

This has led to considerable pressure on the fair value of their available for-sale securities and adjusted net assets in absolute terms. The aggregate fair value of the companies’ available-for-sale securities plunged by over JPY1tn ($9bn) while aggregate adjusted net assets contracted by more than JPY1.4tn quarter-on-quarter.

Nevertheless, AM Best notes 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.

Domestic common stock exposure remains a material risk factor on the balance sheets of major Japanese non-life insurers.

However, the ratings agency believes that systematic equity price risk is unlikely to result in material changes to major non-life insurers’ balance sheet strength assessments, owing to their very strong risk-adjusted capital positions and manageable exposure to domestic common equities.

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

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