(The following statement was released by the rating agency)
Dec 26 -
Summary analysis -- Nippon Life Insurance Co. --------------------- 26-Dec-2012
CREDIT RATING: A+/Stable/-- Country: Japan
Primary SIC: Life insurance
Mult. CUSIP6: 654579
Mult. CUSIP6: 654753
Credit Rating History:
Local currency Foreign currency
04-Oct-2012 A+/-- A+/--
28-Oct-2011 A+/-- --/--
Our ratings on Nippon Life Insurance Co. reflect the company's strong competitive position in the domestic life insurance market and very strong financial flexibility. On the other hand, these factors are offset by weaknesses, including relatively high exposure to equity holdings and weaker capitalization than its peers.
Standard & Poor's Ratings Services believes that Nippon Life maintains a strong competitive position. As Japan's largest life insurer in terms of both business in-force and premium income, it enjoys excellent brand recognition, and holds an extensive sales network, which consists of about 49,000 tied sales agents, about 11,000 independent agency channels that complement its sales agents, and a network of walk-in branches. The company's efforts to strengthen the quality of its tied agency force in recent years have led to steady improvement in policy persistency and agency retention, which we view as a positive factor for its credit quality. On the other hand, it is gradually losing market share, particularly in new businesses, and we view that as a negative factor for the ratings.
We believe Nippon Life has very strong financial flexibility, supported by its well-recognized brand name in Japan and a good level of earnings. The company's financial flexibility is strong, as evidenced by its successful record of issuing kikin--a type of subordinated debt that is unique to Japanese mutual insurers and considered regulatory capital--and an issuance of foreign-currency-denominated subordinated notes in October 2012.
Standard & Poor's believes that Nippon Life maintains a strong financial profile, supported by its strong operating performance and capitalization, and favorable investment profile. However, we view its financial profile as relatively weak compared with other rating factors such as its competitive position. In fiscal 2011 (ended March 31, 2012), Nippon Life's core insurance profit increased to JPY544.3 billion from JPY516.3 billion in the previous year, when it was hurt by the Great East Japan Earthquake and tsunami that struck in March 2011. Nevertheless, excluding the effects of the estimated payouts due to the disaster, the core insurance profit fell reflecting a decline in policies in-force. We expect the insurer's profitability to remain under pressure, based on our assumption that its policies in-force would continue to fall amid stagnant investment conditions over the next two to three years.
We believe Nippon Life's capitalization is strong, based on our assessment using our risk-based capital model as well as our analysis of other qualitative and quantitative factors. In comparison with other insurers, however, Nippon Life's capitalization appears weaker, in our view. The insurer plans to rebuild its capital, which it defines as kikin and internal reserves, by March 2015 to JPY3 trillion, from JPY2.8 trillion in March 2012, through kikin issuance and accumulation of retained earnings. The company strengthened its capitalization by issuing $2 billion U.S. dollar-denominated subordinated notes in October 2012. Nevertheless, Standard & Poor's believes that the pace at which Nippon Life can continue to strengthen its capital will still be affected by stock price fluctuations.
In our opinion, Nippon Life generally maintains a highly diversified, high-quality, and very liquid investment portfolio, but we see its relatively large equity exposure as a risk factor. Because of its large equity holdings, Nippon Life's capitalization is also susceptible to equity market movements.
Standard & Poor's currently views Nippon Life's enterprise risk management (ERM) as adequate, which is the third-highest on a scale of four: excellent, strong, adequate, and weak. In addition, the definition of adequate is further expanded to three levels: adequate with positive trend, adequate with strong risk controls, and adequate. Our adequate assessment on Nippon Life reflects an absence of material flaws in the management of risks the insurer has assumed, in our view.
The stable outlook reflects our view that Nippon Life will continue to maintain its strong competitive position in the Japanese life insurance market, supported by its large and stable franchise. We also expect Nippon Life to maintain a strong financial profile in the medium term. We may raise the ratings if the insurer enhances its competitive position by increasing its new business in-force to make up for reduced policies in-force and, at the same time, if it strengthens its financial profile by raising core insurance profits and materially strengthening its capital base. Conversely, we may lower the ratings if we see deterioration in the company's financial profile due to severe, adverse developments in the investment environment that are worse than the weakened conditions seen in March 2009.
Related Criteria And Research
Interactive Ratings Methodology, published April 22, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008