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(The following was released by the rating agency)
TOKYO, January 31 (Fitch) Fitch Ratings has revised Sompo Japan Insurance Inc.'s (Sompo Japan) Outlook to Positive from Stable and affirmed its Insurer Financial Strength (IFS) Rating at 'A'. 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 Outlook revision reflects Sompo Japan's 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 strengthened 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 group.
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 2.9% in H1 FYE13. 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 (1,473.9% at end-September 2012), backed by its strong earnings and limited exposure to high-risk assets.
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. Net premiums written of Sompo Japan and Nipponkoa, excluding compulsory automobile liability insurance, rose 2.1% yoy in H1 FYE13
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. 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 accelerated the integration of Sompo Japan group and Nipponkoa group by merging in October 2011 their respective growing life insurers, Sompo Japan Himawari Life Insurance Co., Ltd. and Nipponkoa Life Insurance Company, Ltd., as NKSJ Himawari Life. In addition, NKSJ announced that Sompo Japan and Nipponkoa will merge during H1 FYE 2015.
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% (553.6% at end-September 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.