OREANDA-NEWS. Fitch Ratings has affirmed Japan-based Tokio Marine & Nichido Fire Insurance Co., Ltd.'s (TMNF) Insurer Financial Strength (IFS) rating at 'A+'. The Outlook is Stable. TMNF is a core company of a consolidated Tokio Marine Holdings, Inc. (TMHD).


The IFS rating reflects the consolidated credit profile of TMHD, namely its solid capitalisation and robust franchise worldwide, especially in Japan. TMHD's financial position has remained strong, with its consolidated statutory solvency margin ratio (SMR) improving to a sound level of 781.3% at end-March 2015 from 728.4% a year earlier. TMHD's adjusted earnings rose to JPY412bn in the financial year ended March 2015 (FYE15) from JPY278bn a year earlier, and its adjusted return on equity continued to improve to 9.3% from 7.6% a year earlier.

The acquisition of US-based HCC Insurance Holdings, Inc. (HCC; its core insurance operating companies' IFS Ratings AA/Rating Watch Negative), which was announced in June 2015, should enhance TMHD's global diversification. Overseas insurance premiums and business unit profits will rise to about 38% and 46% respectively of the TMHD's total insurance premiums and business unit profits in FYE16, from about 32% and 38% (pre-acquisition basis), according to TMHD's estimate.

Fitch expects any negative impact from the acquisition on TMHD to be manageable, mainly due to the strong capitalisation of both TMHD and HCC, and TMHD's previous success in integrating US non-life insurance subsidiaries, namely Philadelphia Consolidated Holdings Corp. and Delphi Financial Group, Inc.

TMHD's biggest weakness is its domestic equity holdings, which formed about 14% of its assets at end-March 2015. However, it plans to reduce its domestic equity holdings by more than JPY100bn (about 4% of the holdings) in FYE16.

TMNF's combined ratio improved to 89.8% in FYE15 from 91.2% in FYE14, partly because it continued to raise premium rates at its motor insurance business. Also, TMHD's domestic life insurance business is expanding strongly, with the annual premium in force of the profitable third (health) sector increasing 13% in FYE15, and this should help support TMHD's credit profile. TMNF is likely to maintain a healthy profitability in FYE16 as the company holds the average premium rates at its motor insurance business steady.

Fitch assesses TMNF's unadjusted IFS rating at 'AA-', but the adjusted IFS rating is constrained by Japan's sovereign rating. Fitch allows the company's rating to be above that of the sovereign by up to one notch, because TMHD's sizeable international diversification counterbalances its large holdings of Japanese government debt (about 32% of TMHD's assets at end-March 2015). Japan's Long-Term Local-Currency Issuer Default Rating is 'A' with Stable Outlook.


An upgrade is unlikely in the near future, given the rating is constrained by Japan's Long-Term Local-Currency IDR of 'A' with a Stable Outlook. Conversely, if the rating on Japan were lowered, the ratings on the insurer are also likely to be lowered.

Rating triggers for a downgrade include a material erosion of capitalisation caused by a major natural disaster and/or financial crisis, TMHD's consolidated SMR declining below 600%, deterioration in TMNF's net leverage to above 4x, or an unexpected surge in the combined ratio, over a sustained period.