Deal may erode Sompo’s capital but ratings agencies back Endurance acquisition

The financial strength rating of Sompo Japan Nipponkoa following its  planned acquisition of Endurance Specialty Holdings looks stable, according to both S&P Global Ratings and Fitch Ratings.

S&P Global Ratings has affirmed its A+ financial strength rating of Sompo Japan Nipponkoa Insurance.

The outlook of the rating is stable but S&P has suggested if the $6.3 billion deal goes through as planned, it could erode Sompo’s capital.

The rating agency has therefore lowered its assessment of the group’s financial risk profile to strong from the previous assessment of very strong

The stable outlook of Sompo reflects S&P’s view that the group will be able to maintain its current credit profile over the next two years.

Supporting this view is the suggestion Sompo has a very strong competitive position in Japan's property/casualty insurance market and growth potential in the domestic life and overseas insurance businesses, the agency said.

Ratings may be lowered, however, if persistent deterioration in Sompo's operating performance as measured by return on equity, return on revenue, and combined ratio as compared with peers, S&P added.

Fitch Ratings has similarly stated that its insurer financial strength rating of ‘A’ will not be affected by the proposed acquisition of Endurance.

Fitch believes the estimated acquisition costs of about ¥638 billion ($6.3 billion) are manageable compared to holdings company Sompo’s net assets of ¥1.7 trillion, shareholders' equity of ¥839 billion and cash and equivalents of ¥551 billion at the end of March 2016.

Furthermore, Fitch believes the deal will be positive for Sompo’s credit profile over the medium term due to Endurance's extensive franchise in the US non-life insurance markets, solid underwriting expertise and strong capitalisation.

Endurance’s focus on agriculture and specialty lines is also expected to help Sompo diversify its risk profile and raise overseas earnings as a share of the Japanese group's revenue.