AM Best Affirms Credit Ratings of The Toa Reinsurance Company, Limited and Its Subsidiaries

AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of "a+" (Excellent) of The Toa Reinsurance Company, Limited (Toa Re) (Japan) and its subsidiaries, The Toa Reinsurance Company of America (TRA) (Wilmington, Delaware, USA) and The Toa 21st Century Reinsurance Company, Ltd. (Switzerland). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect Toa Re's balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, favourable business profile and appropriate enterprise risk management.

Toa Re's balance sheet strength assessment reflects consolidated risk-adjusted capitalisation that is at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR), as well as its high quality of capital. The company's elevated reserve position from TRA's reserve strengthening exercise continues to be a key area of uncertainty and the major offsetting factor in Toa Re's balance sheet strength assessment.

Toa Re has experienced net losses and negative comprehensive income in three of the last five fiscal years. Nevertheless, the company made some improvements in fiscal-year 2022, with a net profit of JPY 2.5 billion. The company's combined ratio remained above 100% in the last five fiscal years, primarily due to ongoing reserve strengthening from its U.S. subsidiary, domestic and overseas natural catastrophe losses, non-natural catastrophe large losses and COVID-19 related losses. AM Best views some of those losses, such as COVID-19 related losses, as one-off and non-recurring. Consequently, AM Best expects to see improvements in Toa Re's underwriting performance going forward following its portfolio review and the measures taken by Toa Re to address the reserve strengthening issue. Conversely, the company's investment performance remained stable and profitable with a five-year average net investment return of 2.7% (fiscal-years 2018 ?2022), which partially offset the underwriting losses during the same period.

Toa Re continues to be the sole domestic commercial reinsurer in Japan with a strong market position and a stable market share in the non-life segment. The company has a diversified underwriting portfolio in terms of both product and geography. During fiscal-year 2022, the company's overseas portfolio contributed approximately 60% of its total net premium written (NPW). In terms of product portfolio, its life portfolio contributed approximately 30% of its total NPW, which also provides premium diversification and helps stabilise the company's overall profits.

Negative rating actions could occur if the improvements in Toa Re's underwriting performance from current measures are not materialised and a negative operating performance trend persists. Negative rating actions could also occur if there is material deterioration in the company's risk-adjusted capitalisation or absolute capital size caused by severe underwriting losses or further adverse development in reserving practices. Positive rating actions could occur if Toa Re demonstrates a consistent and sustainable enhancement in its operating performance exceeding the industry average; however, the likelihood of such actions remains limited at this time.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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