(The following statement was released by the rating agency)
Jan 11 -
Summary analysis -- Secom General Insurance Co. Ltd. -------------- 11-Jan-2013
CREDIT RATING: Country: Japan
Local currency A-/Negative/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
01-Nov-2005 A-/-- --/--
21-Oct-2003 NR/-- --/--
Our ratings on Secom General Insurance Co. Ltd. (Secom General; A-/Negative/--) reflect its strategic importance to the Secom group; access to the group's customer base and a high likelihood of financial support from the parent company, if necessary; sales growth backed by its unique cancer insurance product MEDCOM; and a low loss ratio compared with its domestic peers. These positive rating factors are partly offset by the insurer's high expense ratio due to limited economies of scale as well as high risk related to natural disasters, which weighs on its capitalization.
Standard & Poor's Ratings Services considers Secom General a strategically important subsidiary of Secom Co. Ltd. (Secom; not rated), the largest security provider in Japan. Secom General issued new shares to Secom in March and December 2008 and April 2009. In our view, Secom General is highly likely to continue to receive financial support from Secom if necessary, and that is a supporting factor for the ratings. Leveraging its status as the sole non-life insurer of the Secom group, Secom General has developed several unique products. The insurer has created an auto insurance product in which a company representative is immediately dispatched to the site of an accident. In addition, it also offers discounts for fire insurance policies to subscribers of Secom's home security service. However, the insurer's share in the non-life insurance market in Japan remains small at about 0.6% on a net premium income basis as of March 31, 2012. This is despite the Secom group's dominant share in the domestic security service market. As such, in Standard & Poor's opinion, the insurer has derived limited synergies from its relationship with the Secom group.
Meanwhile, Secom General's unique third-sector insurance product, MEDCOM, which covers advanced treatments for cancer not covered by national health insurance, have enjoyed brisk sales. That has contributed to growth in its overall business and it is the second-largest revenue generator after fire insurance. Secom General has achieved solid sales of MEDCOM mainly due to its successful alliance with Fukoku Mutual Life Insurance Co. (A-/Stable/--), which enables the product to be sold through Fukoku Life's exclusive sales agents. Although the cancer insurance market is becoming more competitive, if MEDCOM sales continue to grow, we expect the product to mitigate to a certain degree the insurer's currently volatile profits due to natural disasters.
Secom General's net premium income for fiscal 2011 (ended March 31, 2012) increased 8.5% year on year to JPY38.6 billion, while that in the first half of fiscal 2012 (ended Sept. 30, 2012) rose 2.8%. Therefore, Standard & Poor's believes that the insurer's business franchise is gradually growing. Secom General has a favorable loss ratio in comparison with major Japanese non-life insurers, because fire insurance, which has a lower loss ratio than voluntary automobile insurance, accounts for a larger proportion of its portfolio (38.1% in fiscal 2011). However, its business performance is directly affected by natural disasters. Its loss ratio stayed relatively high at 54% in the first half of fiscal 2012 because of losses from natural disasters, although it had improved from 58.6% in fiscal 2011, which was affected by the Great East Japan Earthquake.
Although Secom General's expense ratio improved to 37% in fiscal 2011 from 41.3% in fiscal 2010, it remains high compared with its peers, reflecting its limited economies of scale. As the company continues to reduce its expenses and pursue operating efficiency along with its business strategy, we hold the view that the ratio is likely to gradually improve in the long run.
Standard & Poor's regards Secom General's enterprise risk management (ERM) as adequate because we have not observed any material flaws in its risk management.
The insurer has made steady progress in reducing investment risk through measures such as shifting its investment assets to fixed-interest bonds with strong credit profiles. In our view, the company's efforts to mitigate investment risk are likely to contribute to stable profitability, although its investment income is decreasing. The amount of risk-monitored loans is gradually decreasing and we consider the company's investment asset quality to be improving.
Secom General's capitalization remains weak compared to its 'A'-rated peers. This is because it faces high natural disaster-related risk as fire insurance products account for a high percentage of its portfolio. In addition, its capitalization--relative to risks--is declining, in our view. The decline is caused by an increase in its catastrophe risk due to solid growth in fire insurance sales, as well as weakened capital from its net loss. However, it could receive financial support from its parent, in our opinion.
The outlook is negative. Although Secom General is likely to receive financial support from its parent, if necessary, as a strategically important subsidiary of Secom, its capital is pressured by increased earnings volatility due to natural disasters as well as high exposure to catastrophe risk. We may downgrade the company if natural disasters occur and further drag down its earnings and capital, making it unlikely for the company to restore its capitalization to the existing level within two years; or if we determine that the company's position as a strategically important subsidiary within the Secom group has weakened. We may revise the outlook back to stable if the company improves its operating performance, posts net income (net profit), and is likely to keep its combined ratio (on an earned-incurred basis, excluding residential earthquake and compulsory auto liability insurance) below 100%, and consequently improves and stabilizes its capitalization.
Related Criteria And Research
-- Interactive Ratings Methodology, April 22, 2009.
-- Group Methodology, April 22, 2009.
-- Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004
(Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.firstname.lastname@example.org)
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