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March 25 (The following statement was released by the rating agency)
Fitch Ratings has assigned Sompo Japan Insurance Inc.'s
(Sompo Japan) recently announced USD1.4bn 60-year step-up callable subordinated
notes a 'BBB+' rating. Fitch has simultaneously published the insurer's 'A'
Long-Term Issuer Default Rating (IDR) and affirmed its Insurer Financial
Strength (IFS) Rating at 'A'. The Outlook is Positive.
Sompo Japan is a core company of NKSJ Holdings, Inc. <8630.T< (NKSJ), along with
Nipponkoa Insurance Co., Ltd. (Nipponkoa) and NKSJ Life Insurance, Inc. (NKSJ
Key Rating Drivers
The proceeds from the new hybrid debt are likely to be used for refinancing its
current outstanding JPY128bn, 60-year step-up callable subordinated notes, which
the company is likely to redeem in May 2014. Thus, Fitch views the new hybrid
debt issue to be neutral for the company's credit profile.
The subordinated notes are rated two notches below Sompo Japan's Long-Term IDR
to reflect their loss absorption feature including the issuer's option to defer
interest payment. This loss absorption feature has led Fitch to accord the notes
100% equity credit for the agency's internal capitalisation metric. However,
since the notes are dated and do not include a mandatory conversion feature,
they are treated as debt in Fitch's assessment of Sompo Japan's financial
leverage. The notes issue is expected to have temporarily raised Sompo Japan's
financial leverage to 21% from 11% on a pro-forma basis as of end-2012, which is
still appropriate level for its 'A' rating.
Sompo Japan's ratings reflect its continuing solid capitalisation and the
overall improving underwriting fundamentals of NKSJ, mainly due to its steadily
growing and profitable domestic life insurance business. As one of three core
operating companies of NKSJ, Sompo Japan can expect support, if needed, from the
group. In Fitch's view, Sompo Japan's creditworthiness is on a par with that of
NKSJ as a whole, given that the agency regards it as a core entity within the
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 4.3% between March and December 2012.
Furthermore, 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
(1,490.6% at end-2012), backed by its strong earnings and limited exposure to
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 JPY130bn (around
10% of the holdings) in FYE13 (the financial year ending March 2013). These risk
reduction efforts, coupled with NKSJ's sound underwriting fundamentals in
domestic life insurance, have enabled the company to maintain sufficient
capitalisation despite catastrophes in FYE12.
Continued efforts to enhance synergies among its subsidiaries have increased
Fitch's confidence in NKSJ's strategic management. NKSJ announced that Sompo
Japan and Nipponkoa will merge in September 2014.
Rating triggers for an upgrade include further evidence of improvement in NKSJ's
domestic non-life units' profitability and underwriting performance (as measured
by a combined ratio below 100%), while maintaining or improving capitalisation
as measured by Fitch's own internal assessment and by regulator solvency ratios.
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%
(604.7% at end-2012) or if its Fitch's internal capitalisation measures drop
sharply for a prolonged period. Given NKSJ's overall improving credit profile
driven by its solid life insurance unit, negative rating action is unlikely in
the near future.