October 27, 2017 / 6:58 AM / a year ago

Fitch Affirms Sompo Japan Nipponkoa at 'A'; Outlook Stable

(The following statement was released by the rating agency) TOKYO/HONG KONG, October 27 (Fitch) Fitch Ratings has affirmed Sompo Japan Nipponkoa Insurance Inc.'s (Sompo Japan Nipponkoa) Insurer Financial Strength (IFS) Rating at 'A' (Strong) and its Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has simultaneously affirmed the insurer's USD1.4 billion step-up callable subordinated notes due 2073 at 'A-'. KEY RATING DRIVERS The rating action reflects Sompo Japan Nipponkoa's strong market position in the Japanese non-life insurance market and its strong capitalisation. These strengths are counterbalanced by the company's large holdings of domestic equities. Sompo Japan Nipponkoa had a 26% share of the domestic non-life insurance market by net premiums written in the financial year ended March 2017 (FYE17), and Fitch assesses its solvency as strong. The company also reported robust regulatory solvency measures. Sompo Japan Nipponkoa has maintained its healthy underwriting profitability during the recent three years, due mainly to a sustained increase in the motor insurance premium rate. Fitch expects the company to maintain its current profitability over the near future. Sompo Japan Nipponkoa's largest underwriting risk stems from its catastrophe insurance, and the company has tried to improve its risk management by using both its reinsurance programme with strongly rated reinsurers and alternative risk transfer, such as catastrophe bonds. Exposure to domestic equity holdings remains a weakness, although the company is trimming its investments in high-risk assets. The equity holdings decreased by about JPY104 billion (7% of the holdings as of end-March 2016) in FYE17 as a result of the company's continued reduction efforts, and management's goal is to continue to reduce the weight of these investments in its balance sheet. Fitch expects the international insurance businesses of Sompo Holdings, Inc. (SOMPO), Sompo Japan Nipponkoa's parent, to steadily expand, due partly to the contribution from US-based Endurance Specialty Holdings Ltd. (Endurance), currently known as Sompo International (SI), that was acquired by Sompo Japan Nipponkoa. SI will continue to help SOMPO diversify its risk profile and raise overseas earnings as a share of the Japanese group's revenue. SOMPO decided to sell its UK-based subsidiary Sompo Canopius (Canopius) in September 2017 for around JPY105 billion to consolidate its core international insurance businesses as there were overlaps between SI and Canopius' business coverage. SOMPO's consolidated solvency margin ratio declined to 749% at end-March 2017 from 851% a year earlier, partly due to its acquisition of Endurance, but we expect the ratio to improve after the sale of Canopius. SOMPO's presence in the US has increased through SI and as a result, it is likely to incur losses from a series of US hurricanes in 2017, including Hurricanes Harvey, Irma and Maria, and major earthquakes in Mexico in 2017. The company has announced an estimated loss of around JPY70 billion from these events. Fitch expects the losses to be absorbed into the group's annual earnings (adjusted consolidated profit in FYE17: JPY183 billion). Sompo Japan Nipponkoa's unconstrained IFS Rating is 'A+' but the company's final ratings are constrained by Japan's Long-Term Local-Currency IDR of 'A' with a Stable Outlook. Consequently, Fitch applies compressed notching between the IFS Rating and IDR and subordinated debt rating. RATING SENSITIVITIES The IFS Rating on Sompo Japan Nipponkoa may be upgraded if SOMPO achieves sustainable international business diversification, specifically more than 20% of net premium income is sourced from abroad. The following could lead to a downgrade of Sompo Japan Nipponkoa. -Major erosion of capitalisation at SOMPO and deterioration in its adjusted earnings -If SOMPO's consolidated group solvency margin ratio declines to below 500% for a prolonged period. -If Sompo Japan Nipponkoa's financial leverage were to rise above 28% (15% at end-March 2017), or the combined ratio worsens to above 105% (94% in FYE17) on a sustained basis. Contacts: Primary Analyst Teruki Morinaga Director +81 3 3288 2781 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Secondary Analyst Akane Nishizaki Associate Director +852 2263 9942 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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