OREANDA-NEWS. Fitch Ratings has affirmed Nippon Life Insurance Company's (Nippon Life) Insurer Financial Strength (IFS) rating at 'A' and its Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Negative. Fitch has also affirmed the company's US dollar-denominated subordinated notes at 'A-'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Nippon Life's IFS rating is currently capped by Japan's Long-Term Local-Currency IDR of 'A' with Negative Outlook and is one notch below its unadjusted IFS rating of 'A+'. Fitch does not allow Nippon Life's rating to be above that of the sovereign, given the company's high level of government debt holdings (32% of Nippon Life's invested assets as of end-March 2016) and its lack of business diversification outside Japan.

The affirmation of the rating reflects Nippon Life's very strong business profile in Japan, which was further underpinned by management integration of Mitsui Life Insurance Company Limited (Mitsui Life, IFS: A/Negative) in 2015, sufficient capital, low financial leverage (10% at end March 2016) and stable profit margin. The rating also reflects susceptibility of the company's capital adequacy to stock market due to its large exposure to domestic equities (equity investment to adjusted equity was 126% at end March 2016).

Fitch believes Nippon Life is likely to maintain sufficient capitalisation, based on the existing capitalisation level, backed by foundation funds (kikin), issue of subordinated debts and sustainable retained earnings. Its statutory solvency margin ratio (SMR) on a consolidated basis remained high at 924% at the end of the financial year to March 2016 (FYE16), compared with 943% at FYE15, despite acquisitions of Mitsui Life in 2015 for about JPY300bn. However, Nippon Life's economic value-based capitalisation was negatively affected by the current low interest environment due to duration mismatch between assets and liabilities, as is the case with most of other Japanese life insurers, in Fitch's view.

Nippon Life's core profit is likely to be stable over the next few years, underpinned by substantial mortality and morbidity margins from its seasoned life insurance portfolio; earnings are also backed by marginal growth in the "third-sector" (medical) insurance plans, which generated a wider morbidity margin. The third sector's annualised in-force premium rose by 2% in FYE16.

RATING SENSITIVITIES

An upgrade of Nippon Life's ratings is unlikely in the near future as the Insurer Financial Strength rating is currently on a par with Japan's Long-Term Local-Currency IDR.

Key rating triggers that could lead to a downgrade include:

- A downgrade of Japan's Long-Term Local-Currency IDR

- A significant decline in the capital buffer, specifically, if consolidated SMR were to decline below 600% for a sustained period

- Decline in profitability due to a change in product mix, specifically, a decline in Nippon Life's core profit margin below 10% for a prolonged period

FULL LIST OF RATING ACTIONS

Nippon Life Insurance Company:

IFS Rating affirmed at 'A': Outlook Negative,

Long-Term IDR affirmed at 'A': Outlook Negative.

US dollar-denominated subordinated notes due 18 October 2042 affirmed at 'A-'

US dollar-denominated subordinated notes due 16 October 2044 affirmed at 'A-'

US dollar-denominated subordinated notes due 20 January 2046 affirmed at 'A-'