Fitch Affirms Dai-ichi Life at IFS Rating 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) of The Dai-ichi Life Insurance Company, Limited (Dai-ichi Life) at 'A'. The Outlook is Stable.
The agency simultaneously affirmed at 'A-' 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 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. The consolidated statutory solvency margin ratio (SMR) remained adequate at 768% at end-December 2015, but had dropped from 818% at end-March 2015 due to a fall in unrealised gains on securities.
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 (IFS of its primary life insurance subsidiaries, such as Protective Life Insurance Company: A/Stable). Dai-Ichi Life estimates that around 20% of its consolidated net earnings will stem from outside Japan (mainly from the US and Australia) in the financial year ending 31 March 2016 (FYE16). This is considerably more than other Japanese life insurers.
Dai-ichi Life announced its strategic business alliance with Japan Post Insurance Co., Ltd. (Japan Post Insurance) in March 2016. Dai-ichi Life is already taking advantage of Japan Post Insurance's nationwide sales networks and Fitch believes the synergy will continue expanding over the mid- to long-term. For example, by collaborating on insurance product development and distribution throughout Japan.
Dai-ichi Life's rating is currently capped by the Japanese sovereign's Long-Term Local-Currency IDR of 'A', which is one notch below Dai-ichi Life's unadjusted IFS Rating of 'A+'. This is due to Dai-ichi Life's high level of government debt holdings (29% of consolidated assets at end-September 2015) that the company's international diversification is not big enough to offset.
Fitch sees some risks in the duration mismatch between assets and liabilities and foreign-currency exposure under the ongoing low-interest-rate environment. There is also price fluctuation risk in the company's domestic equity holdings.
Dai-ichi Life's (standalone basis) annual in-force premiums from the third sector rose 2.7% yoy in April to December 2015, after increasing 3% yoy in the preceding fiscal year. The pace is faster than its peers. The company disclosed that the third-sector business contributed more than 60% of its gross sales revenue (equivalent to the value of new business using embedded value methodology) in 1HFYE16. Its consolidated underwriting profit is likely to continue expanding steadily, supported by stable growth in the third sector and its developing international businesses.
Dai-ichi Life Group, which includes The Dai-ichi Frontier Life Insurance Co., Ltd. and The Neo First Life Insurance Company, Limited, has 15% market share in the Japanese life insurance market by value of policies in-force at end-March 2015.
An upgrade is unlikely in the near future, as the rating is constrained by the sovereign rating. Conversely, if the rating on Japan were lowered, the ratings on the insurer are also likely to be lowered.
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 SMR declined below 600%, consolidated financial leverage rose above 25% (5% at end-March 2015) or its (standalone basis) core profit margin declined below 10% (16% in April to December 2015) for a prolonged period.