A.M. Best Affirms Ratings of The Toa Reinsurance Company, Limited

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit rating (ICR) of “aa-” of The Toa Reinsurance Company, Limited (Toa Re) (Japan).

Concurrently, A.M. Best has upgraded the FSR to A+ (Superior) from A (Excellent) and the ICR to “aa-” from “a+” of The Toa Reinsurance Company of America (TRA) (headquartered in Morristown, NJ). The outlook for all ratings is stable.

The ratings reflect Toa Re's strong risk-adjusted capitalization and the continuous diversification of its underwriting income sources.

A.M. Best is of the opinion that the current capitalization of Toa Re is strong enough to support its current ratings, even though Toa Re's risk-based capitalization deteriorated somewhat in fiscal-year 2010. The deterioration was due to the Tohoku earthquake and tsunami, as well as the decline in the stock market following these events. The local solvency ratio declined to 768% in fiscal-year 2010 from 793% in fiscal-year 2009, and Toa Re's absolute adjusted capital decreased by 6.7% to JPY 243 billion (USD 2.9 billion) in fiscal-year 2010. Whereas Toa Re's risk-based capitalization was highly correlated to the stock index in the past, the company has reduced its volatile assets over the years. Domestic equity composition out of total assets stood at 18% in fiscal-year 2010 compared to 41% in fiscal-year 2006.

Toa Re recorded a combined ratio of 112% (111% consolidated) in fiscal-year 2010 with a five-year average combined ratio of 94% (95% consolidated). The increase in the ratio is due to the losses stemming from the Tohoku earthquake. The net incurred loss (excluding personal residential earthquake insurance) from this event was JPY 19 billion (USD 229 million). Although the company will continue to be exposed to the Japanese catastrophe risk, Toa Re has diversified its revenue source over the years by expanding its life reinsurance, co-operative and overseas businesses.

Offsetting these positive rating factors is the decreasing Japanese non-life reinsurance market.

The ratings of TRA have been aligned with its parent, reflecting its strategic importance as an operating subsidiary. TRA has a well established niche in the U.S. regional markets, stable underwriting performance and strong risk-adjusted capital position. The U.S. operation has grown to represent a material part of the organization in terms of premium and operating income, while providing Toa Re opportunity for strategic expansion and portfolio diversification. At the same time, TRA benefits from the global presence and strength of its ultimate parent.

The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Rating Members of Insurance Groups”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding Universal BCAR”; “Risk Management and the Rating Process for Insurance Companies.”, and “Natural Catastrophe Stress Test Methodology.” Methodologies can be found at www.ambest.com/ratings/methodology.

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