OREANDA-NEWS. Fitch Ratings has upgraded The Dai-ichi Life Insurance Company, Limited's (Dai-ichi Life) Insurer Financial Strength (IFS) Rating to 'A+' from 'A'. The Outlook is Negative. Fitch has simultaneously affirmed Dai-ichi Life's Long-Term Issuer Default Rating (IDR) at 'A' and revised the Outlook to Stable from Negative.

Fitch has also affirmed at 'A-' the ratings on Dai-ichi Life's USD1.3bn cumulative perpetual subordinated notes with interest deferral options issued in March 2011, and its USD1bn cumulative perpetual subordinated notes with interest deferral options issued in October 2014.

KEY RATING DRIVERS

The one-notch upgrade of Dai-ichi Life's IFS Rating reflects the company's recent successful international expansion, which has pushed its global diversification above the threshold at which it may be rated above the Japanese sovereign (Long-Term Local-Currency IDR: A/Negative), as outlined in Fitch's methodology. Dai-ichi Life has been expanding its international business since 2011. This is driven mainly by its successful integration of Australia-based TAL Group, whose core business is life insurance, and US-based Protective Life Corporation (Protective, IFS of its primary life insurance subsidiaries, such as Protective Life Insurance Company: A/Stable).

In Fitch's view, only insurers with very good credit quality and sizeable international business diversification can be rated above the sovereign rating if they hold high levels of government debt (that is, more than 20% of their invested assets). Insurance groups that generate 20% or more of their net premiums from international business sources on a sustained basis would be considered as having sizeable international business diversification.

Dai-ichi Life disclosed that it reliably derived more than 20% of its consolidated annualised premiums in-force from outside Japan (mainly from the US and Australia) as of the financial year ended 31 March 2016 (FYE16). This is considerably more than other Japanese life insurers, and Fitch expects Dai-ichi Life's international insurance businesses to continue to steadily grow, partly supported by Protective's sustainable organic growth.

Dai-ichi Life has achieved the necessary international business diversification that counterbalances its heavy Japanese government debt holdings (30% at end-March 2016, consolidated basis). This would allow the rating on the insurer to be up to one notch higher than the sovereign rating.

Fitch has maintained the Negative Outlook on Dai-ichi Life's IFS Rating to ensure the rating is capped at a maximum of one notch above Japan's rating. However, the agency revised the Outlook for the company's Long-Term IDR to Stable from Negative because its Long-Term IDR can exceed the sovereign rating by up to one notch, according to Fitch's methodology.

Dai-ichi Life's ratings reflect strong capital adequacy, recent successful international expansion, steady growth in the more profitable domestic "third" (health) sector, and a well-established brand as the second-largest life insurer in Japan. However, its capital adequacy remains susceptible to both interest-rate and stock-market volatility due to the duration mismatch between assets and liabilities, and high investment exposure to domestic equities (equity holdings to adjusted equity of 123% at end-March 2016).

RATING SENSITIVITIES

An upgrade is unlikely in the near future as the rating is constrained by the sovereign rating, which is on Negative Outlook. Conversely, if the rating on Japan were lowered, the IFS Rating on the insurer is also likely to be lowered. However, the subordinated debts' ratings will remain at 'A-', even if Dai-ichi Life's IFS Rating and Long-Term IDR are downgraded to 'A-' because of the sovereign downgrade, according to Fitch's methodology.

Downgrade rating triggers would include a major erosion of capitalisation, deterioration in profitability, and volatility in the embedded value. Specifically, a downgrade could occur if Dai-ichi Life's consolidated solvency margin ratio (SMR) were to decline below 600% (764% at end-March 2016), consolidated financial leverage rises above 25% (6% at end-March 2016), or its (standalone basis) core profit margin were to decline to below 10% (16% in FYE16), for a prolonged period.

FULL LIST OF RATING ACTIONS

The Dai-ichi Life Insurance Company, Limited:

IFS Rating upgraded to 'A+' from 'A': Outlook Negative

Long-Term IDR affirmed at 'A': Outlook revised to Stable from Negative

US dollar denominated cumulative perpetual subordinated notes issues March 2011 affirmed at 'A-'

US dollar denominated cumulative perpetual subordinated notes issues October 2014 affirmed at 'A-'