OREANDA-NEWS. Fitch Ratings has assigned The Dai-ichi Life Insurance Company, Limited's (Dai-ichi Life) proposed US dollar step-up callable cumulative perpetual subordinated notes with interest deferral options an expected rating of 'A-(EXP)'.

The proceeds from the note issue will be used for general corporate purposes. The total issuance amount and the coupon of the subordinated notes have yet to be decided. The final rating is contingent on the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

The subordinated notes are rated one notch below Dai-ichi Life's Long-Term Issuer Default Rating to reflect the assumption of "Below Average" recovery and minimal non-performance risk (no additional notching applied), in line with Fitch's notching criteria.

The notes include a mandatory interest deferral feature on cumulative basis, which is triggered when Dai-ichi Life's statutory solvency margin ratio (SMR) falls below the regulatory capital requirement of 200% (on a consolidated or non-consolidated basis) or on the issuance of an order of prompt corrective action by Japan's Financial Services Agency. The company' SMR was 901% on non-consolidated basis, and 764% on consolidated basis at end-March 2016.

The subordinated note is classified as 100% capital within Fitch's risk-based capitalisation and is classified as 50% debt for the agency's financial leverage calculations according to Fitch's methodology. Fitch expects consolidated financial leverage to remain low (6% at the end March 2016) for Dai-ichi Life's rating category and interest coverage to be strong.

Dai-ichi Life plans to establish a holding company in October 2016 to strengthen corporate governance globally, but will continue to hold its subordinated debts itself as a core insurance operating company (not a holding company) in the group. Therefore, according to Fitch's methodology, the ratings on Dai-ichi Life's subordinated debts will not be changed following the establishment of the holding company.

RATING SENSITIVITIES

Fitch may take the negative action on the insurer's IFS Rating (A+/Negative) and IDR (A/Stable) if the rating on Japan (Long-Term Local-Currency IDR: A/Negative) were lowered. However, the rating on the subordinated notes would remain at 'A-', even if Dai-ichi Life's IFS Rating and Long-Term IDR were downgraded to 'A-' because of the sovereign downgrade, according to Fitch's methodology.

The rating on the subordinated notes would be downgraded if Dai-ichi Life's ratings were downgraded due to deterioration of its own credit profile. Downgrade rating triggers for the company 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 SMR were to decline below 600%, 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.