OREANDA-NEWS. S&P Global Ratings today said it has affirmed its 'A+' financial strength and long-term counterparty credit ratings on Sompo Japan Nipponkoa Insurance Inc. and Sompo Japan Nipponkoa Himawari Life Insurance Inc. We regard both Japan-based companies as core operating subsidiaries of Sompo Japan Nipponkoa Group. We have also affirmed at 'A-' our rating on the U. S. dollar-denominated subordinated notes issued by Sompo Japan Nipponkoa Insurance in March 2013. In addition, we have affirmed our ratings on three of the group's overseas operating subsidiaries (see list below). The rating outlooks on the subsidiaries are stable.

Our rating affirmations follow a ?200 billion subordinated bond issuance by Sompo Japan Nipponkoa Insurance on Aug. 8. The insurer plans to use the funds raised for long-term investments and working capital. In our view, the subordinated bond issuance will benefit the group's capitalization. We have thus revised our assessments of both the group's capital and earnings and financial risk profile to very strong from strong. We also think the subordinated bond issuance will have limited negative effects on the group's financial leverage and fixed-charge coverage (coverage of fixed financial expenses, such as interest expenses). We continue to assess the group's business risk profile as very strong. The revised assessment of the financial risk profile to very strong has led us to revise the anchor to 'aa-' from 'a+' as we derive the anchor from a combination of our assessments of the business and financial risk profiles. However, because we view the credit profile as constrained by the sovereign rating on Japan as the majority of the group's businesses and assets under management are based domestically, we continue to assess the group credit profile (GCP) as 'a+' and have affirmed the ratings on the operating subsidiaries.

We regard the latest subordinated bonds issued by Sompo Japan Nipponkoa Insurance as intermediate equity content based on the following: The bonds' terms are sufficiently long under our hybrid criteria; redemption is basically not allowed for 10 years from issuance; although the interest rate will be stepped up after 10 years, the step-up of the coupon will be moderate at 100 basis points; the issuer can defer interest payments at its discretion; and the repayment of the bonds at the time of liquidation is subordinated to other senior debt, including policy obligations.

We understand that mandatory deferral of interest will occur if the solvency margin of Sompo Japan Nipponkoa Insurance or that of the group's holding company, Sompo Japan Nipponkoa Holdings Inc., falls below 200% in accordance with applicable regulatory requirements in Japan; when deferral of interest is required under applicable regulatory requirements in Japan; or when the regulator renders a prompt corrective action order on Sompo Japan Nipponkoa Insurance or Sompo Japan Nipponkoa Holdings. We believe that the issuer is highly likely to defer interest payments at its discretion before such a regulatory deferral could occur. Accordingly, in our assessment of the equity content of the subordinated bonds, we do not place emphasis on their mandatory interest deferral features.

The stable outlooks on the group's core subsidiaries reflect our view that it will be able to maintain its strong credit profile over the next two years. We base our view on our assessment that it has a very strong competitive position in Japan's property/casualty insurance market, steady growth potential in the domestic life insurance business, and a strong financial profile.

We may lower our ratings on the group's core subsidiaries if: we see persistent deterioration in the group's operating performance as measured by return on equity, return on revenue, and combined ratio as compared with peers; the group's prospective capital adequacy deteriorates to a level significantly below the 'A' level in our capital model; or we lower our long-term sovereign rating on Japan. Meanwhile, we consider the likelihood of an upgrade to be remote. This is because the group has a large-scale business franchise in Japan and significant domestic investment assets. This limits the likelihood of our ratings on the group's core subsidiaries exceeding the sovereign ratings on Japan.