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Nov 11 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Japan-based Dai-ichi Life Insurance Company Limited's (Dai-ichi Life) Insurer Financial Strength (IFS) Rating to 'A+' from 'A' and its Long-Term Issuer Default Rating (IDR) to 'A' from 'A-'. The Outlook is Stable. Simultaneously, the agency has upgraded Dai-ichi Life's USD500m subordinated notes due 17 March 2014 to 'A-' from 'BBB+'.
KEY RATING DRIVERS
The upgrade reflects Dai-ichi Life's improved capital adequacy, its recent successful international expansion through the smooth integration of TAL Group whose core business is Australian life insurance, its steady growth in the more profitable domestic third (health) sector, and its well-established brand as the second-largest life insurer in Japan. Efforts to accumulate core capital have helped improve its statutory solvency margin ratio (SMR) to 715.2% at end-March 2013 from 575.9% at end-March 2012.
Dai-ichi Life has been expanding its international businesses since 2011, mainly driven by its integration of TAL Group. The company now generates 10% to 15% of its adjusted earnings from outside Japan (mainly from Australia), which is considerably more than other Japanese life insurers.
Dai-ichi Life's annual in-force premiums from the third sector rose 1.5% in the fiscal year ended 31 March 2013 after increasing 1.7% in the preceding fiscal year. The increase in premiums is at a moderately faster pace than at its peers. Fitch estimates that the third sector accounts for about half of Dai-ichi Life's total insurance underwriting profit. The agency expects Dai-ichi Life's total insurance underwriting profit to continue to steadily expand, supported by the third sector and by the company's growing international businesses.
Dai-ichi Life is strengthening its enterprise risk management and reducing the duration mismatch between assets and liabilities, which is one of the primary risks for the company. It is also reducing another primary risk, its domestic equity holdings, which had a total book value of JPY1,607bn at end-March 2013, down from JPY1,675bn at end-March 2012. The company's negative spread burden remains sizeable mainly due to the sustained low bond yield in Japan. However, Fitch believes that the spread burden is likely to continue to narrow on further reduction of the average guaranteed yield.
Dai-ichi Life has a market share of 16.5% by value of policies in force at end-March 2013.
An upgrade is unlikely in the near future because the rating is constrained by the sovereign rating. Japan's Long-Term Local-Currency Issuer Default Rating is 'A+' with Negative Outlook.
Key negative rating triggers include material erosion of capitalisation, deterioration in profitability and volatility in the embedded value. Specifically, negative rating action may result if Fitch's internal capitalisation measure for Dai-ichi Life falls sharply, the company's operating leverage rises above 15x (10.9x at end-March 2013), or its financial leverage rises above 25% (9.0% at end-March 2013), for a prolonged period.
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