OREANDA-NEWS. Fitch Ratings says Sompo Japan Nipponkoa Holdings, Inc.'s (SOMPO) agreement to purchase a 7.8% stake in France-based reinsurer, SCOR S.E. (SCOR; Insurer Financial Strength (IFS) A+/Positive) through its largest subsidiary Sompo Japan Nipponkoa Insurance Inc. (Sompo Japan Nipponkoa; IFS A+/Rating Watch Negative) is credit neutral.

The Japanese group agreed to buy the stake from Patinex AG and plans to increase its stake in SCOR to 15% by buying shares from other shareholders, subject to the required regulatory approvals.

The addition of earnings from SCOR will raise Sompo Japan Nipponkoa's net income by around JPY10bn a year from the financial year ending March 2017 (FYE17), which represents 5% to 10% of the consolidated adjusted earnings of SOMPO.

In addition, SCOR's strength in life reinsurance, which accounted for 56% of its gross total premium written in 2014, will diversify Sompo Japan Nipponkoa's premiums, which mainly derive from non-life insurance businesses.

Sompo Japan Nipponkoa will become by far the largest shareholder in SCOR after it purchases a 15% stake, but the Japanese company intends to be a passive shareholder and not to intervene in SCOR's daily operations. This is mainly because it has limited reinsurance expertise and there is no benefit to directly controlling SCOR's profitable operations. In Fitch's view, SOMPO's purchase of the 15% stake is more of an investment to diversify its earnings sources to include the life reinsurance sector, rather than a direct expansion into more profitable overseas insurance markets.

The purchase price of around JPY110bn for a 15% stake is unlikely to weigh on the SOMPO group's overall credit fundamentals, as it will be fully cash funded, partly through the intended sale of domestic equity holdings (of around JPY100bn) at Sompo Japan Nipponkoa in FYE15.

The company has used its capital and liquidity buffers to expand overseas. For example, it has acquired UK-based insurance and reinsurance group Canopius in December 2013.

However, Sompo Japan Nipponkoa's global diversification (through SOMPO) has yet to reach the level at which Fitch would allow its rating to exceed Japan's Long-Term Local-Currency Issuer Default Rating(A+/Rating Watch Negative).