Fitch Ratings, a global credit rating agency, has predicted that Japanese non-life insurance companies will see strong profits from their international businesses and investments. These profits will help balance out weaker earnings from their domestic operations, particularly in motor and property insurance, in the financial year ending March 2025 (FYE25).

Overview of the Report

In its report titled “Japanese Non-Life Insurance Dashboard: FYE24 Results,” Fitch highlights the performance of Japan’s three major non-life insurers: MS&AD Insurance Group Holdings, Tokio Marine Holdings, and Sompo Holdings. These companies achieved record-high profits in FYE24. The main reasons for these strong profits were the high profitability of their overseas subsidiaries, fewer claims related to the pandemic, and investment profits from selling strategic shareholdings. Additionally, the depreciation of the Japanese yen made earnings from their overseas subsidiaries more valuable when converted back to yen.

Challenges in Domestic Underwriting

Fitch anticipates that the main business line for these insurers, motor insurance, will face a challenging environment. As traffic levels return to normal after COVID-19, the frequency of claims is expected to rise. Repair costs for vehicles are also increasing, adding to the pressure on motor insurance. Although there will be a premium rate hike in property insurance starting in October 2024, its impact will be felt gradually over time.

Offsetting Weak Domestic Performance

Despite the challenges in the domestic market, Fitch expects that the earnings from the insurers’ overseas subsidiaries will help offset the weak performance in domestic underwriting. This means that while the Japanese market may not perform strongly, the companies’ international operations will continue to contribute positively to their overall financial health.

Strategic Shareholdings and Equity Risk

One of the key credit challenges for these insurers is the risk associated with their strategic shareholdings. Strategic shareholdings refer to investments in other companies that are held for strategic reasons rather than for immediate profit. Both Tokio Marine and MS&AD plan to sell all of their strategic shareholdings by the end of March 2030, and Sompo aims to do the same by the end of March 2031. The accelerated sales of these shareholdings will continue to contribute to the companies’ earnings in FYE25.

Strong Capital Adequacy

Fitch also highlights the strong capital adequacy of these insurers in FYE25. Capital adequacy refers to the financial strength of a company and its ability to withstand financial stress. The economic solvency ratio, a measure of capital adequacy, improved in FYE24 and remained sufficient for maintaining their current ratings. This improvement was supported by the accumulation of core capital, including retained earnings and capital reserves.

Detailed Breakdown

1. MS&AD Insurance Group Holdings
   - Performance in FYE24: MS&AD achieved high profits due to strong international operations and fewer pandemic-related claims.
   - Challenges in FYE25: The company will face increased claims in motor insurance as traffic levels return to normal and repair costs rise. However, profits from overseas subsidiaries are expected to offset these challenges.
   - Strategic Shareholdings: MS&AD plans to sell all its strategic shareholdings by the end of March 2030, which will contribute to its earnings.

2. Tokio Marine Holdings
   - Performance in FYE24: Tokio Marine also saw high profits from its international subsidiaries and investment profits from selling strategic shareholdings.
   - Challenges in FYE25: Similar to MS&AD, Tokio Marine will face increased claims in motor insurance. However, its strong international operations will help balance out the weaker domestic performance.
   - Strategic Shareholdings: Tokio Marine plans to dispose of all its strategic shareholdings by the end of March 2030, reducing equity risk and contributing to its earnings.

3. Sompo Holdings
   - Performance in FYE24: Sompo benefited from strong international operations and fewer pandemic-related claims, leading to high profits.
   - Challenges in FYE25: The company will also face challenges in motor insurance due to higher claim frequency and repair costs. Nevertheless, its overseas subsidiaries will help mitigate the impact.
   - Strategic Shareholdings: Sompo aims to sell all its strategic shareholdings by the end of March 2031, continuing to contribute to its earnings and reducing equity risk.

In summary, Fitch Ratings expects Japanese non-life insurers to maintain strong profits in FYE25, thanks to their international operations and strategic investments. While they will face challenges in their domestic motor and property insurance lines, the profitability of their overseas subsidiaries and the sale of strategic shareholdings will help balance out the weaker performance at home. Additionally, the insurers’ strong capital adequacy will support their financial stability and credit ratings.

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