HONG KONG: High common stock leverage among each of Japan’s major non-life insurers brings systematic equity price risk into greater consideration, given the current COVID-19-driven stock market volatility, according to an AM Best special report.

The Best’s Special Report, “Japan Non-Life: Robust Capitalisation to Weather Stock Market Volatility,” states that stock market volatility continues to pose the biggest challenge to the balance sheets of Japan’s major non-life insurers, given the potential losses to the asset valuations that companies may face during global stock market routs.

The report notes that the top 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 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.

The aggregate fair value of the companies’ available-for-sale securities plunged by over JPY 1.0 trillion (USD 9 billion), while aggregate adjusted net assets contracted by more than JPY 1.4 trillion (USD 12 billion) 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, AM Best 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.

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.