March 25, 2013 / 7:52 AM / in 5 years

RPT-Fitch rates Sompo Japan's hybrid debt 'BBB+'

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March 25 (Reuters) - (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 Himawari Life). 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 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 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 high-risk assets. 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 Sensitivities 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.

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