Feb 6 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Sompo Japan Insurance Inc.'s (Sompo Japan) Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) to 'A+' from 'A'. The Outlook is Stable. Fitch has simultaneously upgraded the insurer's USD1.4bn 60-year step-up callable subordinated notes to 'A-' from 'BBB+'.
Sompo Japan is a core company of NKSJ Holdings, Inc. (NKSJ), along with Nipponkoa Insurance Co., Ltd. (Nipponkoa) and NKSJ Life Insurance, Inc. (NKSJ Himawari Life).
The upgrade reflects Sompo Japan's strengthened capitalisation and the overall improving underwriting fundamentals of NKSJ, mainly due to a recovery in NKSJ's domestic non-life business, as well as a steadily growing and profitable domestic life insurance business. Sompo Japan will become by far the largest operating company in the group following the expected merger with Nipponkoa in September 2014. According to the terms of its criteria, Fitch thus views Sompo Japan as a 'core' entity in the group.
NKSJ has, over the last two years, regained growth momentum and adequate profitability in its domestic non-life insurance business, due to a sustained increase in motor insurance premiums. The group's combined ratio of domestic non-life insurance (excluding no loss no profit businesses) improved to 94.9% in H1 FYE14. Fitch expects its combined ratio to likely remain below 100%, given the group's commitment to raise premium rates further.
Fitch believes that domestic life insurance will continue to be vital to NKSJ's performance. Its unit, NKSJ Himawari Life, saw annualised in-force premiums for the profitable third (health) sector grow 2.8% in H1 FYE14. NKSJ Himawari Life contributes more than 50% of the group's adjusted earnings and Fitch expects this trend to continue over the foreseeable future. NKSJ Himawari Life's statutory solvency margin ratio (SMR) remains high (1,518.7% at end-September 2013), partly backed by limited exposure to high-risk assets.
NKSJ's international insurance business is also moderately but steadily expanding. Sompo Japan is acquiring UK-based Canopius Group Limited, a privately-owned insurance and reinsurance group, which underwrites a diversified portfolio of business from its operations at Lloyd's and around the world. It is also growing its overseas operations not only in selected emerging markets but also in non-Japan developed markets. Fitch expects the contribution from its international operations to likely exceed 10% of the group's total adjusted earnings in the next few years.
Exposure to domestic equity holdings remains a weakness for NKSJ, although efforts are being made steadily to reduce its investments in high-risk assets. Fitch estimates that equity holdings will be reduced by about JPY200bn (around 13% of the holdings) in FYE14. These risk reduction efforts, coupled with NKSJ's sound underwriting fundamentals in both domestic non-life and life insurance, have enabled the company to further strengthen its capitalisation. Continued efforts to enhance synergies among its subsidiaries have increased Fitch's confidence in NKSJ's strategic management. Sompo Japan and Nipponkoa will merge in September 2014 and seek to benefit from streamlined operations and other synergies by JPY56bn per annum by FYE2016.
An upgrade is unlikely in the near future, given that Japan's Long-Term Local-Currency Issuer Default Rating is 'A+' with a Negative Outlook. Rating triggers for a downgrade include material erosion of capitalisation at NKSJ and deterioration in adjusted earnings. Specifically, Sompo Japan's ratings may come under pressure if NKSJ's consolidated group SMR declines to below 500% (772.3% at end-September 2013) or if its Fitch's internal capitalisation measures drop sharply for a prolonged period. In addition, the rating may come under pressure if NKSJ's financial leverage rises above 28% (11% at end-September 2013).