September 27, 2017 / 7:53 AM / a year ago

Fitch Affirms Nippon Life at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/TOKYO, September 27 (Fitch) Fitch Ratings has affirmed Nippon Life Insurance Company's (Nippon Life) Insurer Financial Strength (IFS) rating and its Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed the company's US dollar-denominated subordinated notes at 'A-'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Nippon Life's IFS is constrained by Japan's sovereign IDR of 'A' and rated one notch below the insurer's unconstrained IFS rating of 'A+'. Fitch will not rate Nippon Life above the sovereign due to the company's high level of government debt holdings (30% of invested assets as of 31 March 2017) and its limited business diversification outside Japan. The affirmation of the rating reflects Nippon Life's very strong market position, underpinned by a strong countrywide tied-agents network, sufficient capitalisation, stable profit margins and modest financial leverage. The rating also reflects its large exposure to domestic equities (equity investment to adjusted equity was 136% at end-March 2017), which renders its capital positon vulnerable to a downturn in the domestic stock market. Fitch believes Nippon Life is likely to maintain sufficient capitalisation, backed by foundation funds (kikin), sustainable retained earnings and subordinated debt. Its statutory solvency margin ratio (SMR) on a consolidated basis was 934% at the end of the financial year to March 2017 (FYE17), compared with 923% at FYE16. However, Fitch believes Nippon Life's economic value-based capitalisation is being negatively affected by the current low-interest environment due to a duration mismatch between assets and liabilities, along with many other Japanese life insurers. Fitch expects its core profit to be stable over the next few years, underpinned by substantial mortality and morbidity margins from its seasoned life insurance portfolio. Earnings are also backed by marginal growth in third-sector (medical) insurance plans, which generated a wider morbidity margin. The group's third-sector annualised in-force premiums rose 2% in FYE17. Fitch estimates Nippon Life's consolidated financial leverage ratio, including the kikin and subordinated notes issued in 2017, would have been below 15% on a proforma basis at FYE17. The ratio is well below the median 28% of 'A' rated insurers, based on Fitch's methodology. RATING SENSITIVITIES An upgrade of Nippon Life's ratings is unlikely in the near future as the Insurer Financial Strength rating is currently on par with Japan's Long-Term Local-Currency IDR. However, the ratings on the subordinated notes would remain at 'A-' even if Nippon Life's IFS rating and IDR were downgraded to 'A-' due to a downgrade of Japan's IDR. Key rating triggers that could lead to a downgrade include: - A downgrade of Japan's Long-Term Local-Currency IDR - A significant decline in the capital buffer, specifically, if consolidated SMR were to decline below 600% for a sustained period - A decline in profitability due to a change in product mix, specifically, a decline in Nippon Life's core profit margin below 10% for a prolonged period FULL LIST OF RATING ACTIONS Nippon Life Insurance Company: --IFS Rating affirmed at 'A'; Outlook Stable, --Long-Term IDR affirmed at 'A'; Outlook Stable, --USD2.0 billion subordinated notes due 18 October 2042 affirmed at 'A-' --USD2.25 billion subordinated notes due 16 October 2044 affirmed at 'A-' --USD1.5 billion subordinated notes due 20 January 2046 affirmed at 'A-' Contact: Primary Analyst Akane Nishizaki Associate Director +852 2263 9942 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Teruki Morinaga Director +81 3 3288 2781 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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