OREANDA-NEWS. Fitch Ratings has affirmed Sompo Japan Nipponkoa Insurance Inc.'s (Sompo Japan Nipponkoa) Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has simultaneously affirmed the insurer's USD1.4bn 60-year step-up callable subordinated notes at 'A-'.

KEY RATING DRIVERS
The rating action reflects Sompo Japan Nipponkoa's very strong market position and its strong capitalisation. The company's large holdings of more risky equities act as counterweights in the assessment.

Sompo Japan Nipponkoa's ratings are constrained by Japan's Long-Term Local-Currency IDR which is 'A/Stable'. Consequently, Fitch applies compressed notching between the IDR and subordinated debt rating.

Sompo Japan Nipponkoa had a 26% share of the domestic non-life insurance market by gross premiums written in the financial year ended March 2014 (FYE14), and Fitch assesses its solvency as strong. The company also reported robust regulatory solvency measures. Sompo Japan Nipponkoa substantially improved its underwriting profitability during the recent two years, due to a sustained increase in motor insurance premiums. Fitch expects the trend to continue. The company's largest underwriting risk stems from its catastrophe insurance, which to a large extent it reinsures with strongly rated counterparties.

Exposure to domestic equity holdings remains a weakness for Sompo Japan Nipponkoa, although efforts are being made to reduce its investments in high-risk assets. The equity holdings increased in FYE15 as a result of a rise in stock market valuations, but management's goal is to reduce the weight of these investments in its balance sheet. Increases in the value of equities contributed to stronger capital measures.

Sompo Japan Nipponkoa is the largest company in the insurance group, Sompo Japan Nipponkoa Holdings, Inc (SOMPO). SOMPO's other main Japanese business is Sompo Japan Nipponkoa Himawari Life Insurance, Inc. (Himawari Life). Fitch believes that domestic life insurance will continue to be vital to SOMPO's performance. Himawari Life contributes more than a third of the group's adjusted earnings and Fitch expects this trend to continue over the foreseeable future. Himawari Life's statutory solvency margin ratio remains high (1,676.3% at end-March 2015, up from 1,583.2% a year ago), partly backed by limited exposure to high-risk assets.

SOMPO's international insurance business is also steadily expanding. The company acquired UK-based Canopius Group Limited, a privately-owned insurance and reinsurance group, which underwrites a diversified portfolio of business from its operations at Lloyd's and around the world. SOMPO is also expanding its overseas operations not only in selected emerging markets but also in non-Japan developed markets. The contribution from its international operations exceeded 10% of the group's total adjusted earnings in FYE15.

RATING SENSITIVITIES
Should the sovereign rating be upgraded and the constraints relieved, Fitch would expect to return to standard notching at that time. Also, the ratings on Sompo Japan Nipponkoa may be upgraded if the company significantly increases its global diversification. Conversely, if the rating on Japan were lowered, the ratings on the insurer are also likely to be lowered.

Rating triggers for a downgrade include material erosion of capitalisation at SOMPO and deterioration in its adjusted earnings. Specifically, Sompo Japan Nipponkoa's ratings may come under pressure if SOMPO's consolidated group solvency margin ratio declines to below 500% (820.7% at end 2014) or if its Fitch's internal capitalisation measures drop sharply for a prolonged period. In addition, the ratings may come under pressure if SOMPO's financial leverage rises above 28% (7% at end-March 2015), or Sompo Japan Nipponkoa's combined ratio worsens to above 105% (96.8% in FYE15) on a sustained basis.