September 27, 2017 / 6:33 AM / 9 months ago

Fitch Affirms Sumitomo Life at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/TOKYO, September 27 (Fitch) Fitch Ratings has affirmed Sumitomo Life Insurance Company's (Sumitomo Life) Insurer Financial Strength (IFS) Rating and 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-'. KEY RATING DRIVERS Sumitomo Life's IFS Rating is constrained by Japan's Issuer Default Rating (IDR) of 'A', which is a notch below Sumitomo Life's unconstrained IFS Rating of 'A+'. Fitch does not allow the insurer to be rated above the sovereign because of the company's high government bond holdings (34% of invested assets at 31 March 2017) and its limited business diversification outside Japan. The affirmation of the ratings reflects Sumitomo Life's strong capital adequacy, moderate financial leverage, very strong business profile, and solid mortality and morbidity margins. The company's main credit challenge is persistent duration mismatches between assets and liabilities, which is wider than those of its peers, in Fitch's view. The company is investing in long-dated Japanese government bonds (JGBs), despite the current low interest rates, to prevent the duration gap from widening. Fitch expects Sumitomo Life to maintain capital adequacy commensurate with its rating. The company's consolidated solvency margin ratio remained high at 839% at end-June 2017, versus 813% at end-March 2017. However, Fitch believes Sumitomo Life's economic value-based capitalisation is being negatively affected by the current low interest environment due to the duration gap, as is the case with most other Japanese life insurers. Sumitomo Life redeemed JPY70 billion of foundation funds (kikin) in July and issued USD1.3 billion of subordinated notes in September. Fitch estimates Sumitomo Life's consolidated financial leverage, including this issuance, would have been below 25% at end-June 2017. This is stronger than the median 28% for 'A' rated issuers, based on Fitch's methodology. Sumitomo Life is likely to maintain substantial mortality and morbidity margins, underpinned by the company's strategic focus on the higher-margin medical and nursery care (third sector) products. RATING SENSITIVITIES An upgrade of Sumitomo Life is unlikely in the near future as the company's IFS Rating is constrained by Japan's Long-Term Local-Currency IDR (A/Stable). However, the ratings on the subordinated notes would remain at 'A-', if Sumitomo Life's IFS Rating and IDR were downgraded to 'A-' due to a downgrade of Japan's IDR. The following could lead to a downgrade of Sumitomo Life's ratings: - A significant decline in the capital buffer; specifically, if the consolidated solvency margin ratio declines below 700% for a sustained period - A rise in Sumitomo Life's consolidated financial leverage to over 30% on a sustained period - Decline in profitability for a prolonged period - A significant decline in embedded value for a sustained period FULL LIST OF RATING ACTIONS Sumitomo Life Insurance Company IFS Rating affirmed at 'A': Outlook Stable, Long-Term IDR affirmed at 'A': Outlook Stable. US dollar-denominated subordinated notes due September 2073 affirmed at 'A-' US dollar-denominated subordinated notes due September 2077 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. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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