OREANDA-NEWS. Fitch Ratings has conducted its peer review on nine Japanese life insurers including Mitsui Life Insurance Company Limited (Mitsui Life). The agency has maintained a Rating Watch Positive (RWP) for Mitsui Life's Insurer Financial Strength (IFS) Rating of 'BBB+'. The RWP was assigned on 14 September 2015, following the announcement that Mitsui Life and Nippon Life Insurance Company (Nippon Life, IFS: A/Stable) had signed a basic agreement whereby Nippon Life will purchase all of Mitsui Life's shares and declare Mitsui Life as its affiliate.

KEY RATING DRIVERS
The ratings reflects Fitch's expectation that the company will maintain sufficient capitalisation for its rating category, based on moderate investment risks and declining risk associated with minimum guarantees of variable annuity products. These strengths are offset by relatively thin core-profit margins and a high degree of sensitivity of its embedded value to potential movements in interest rates.

Mitsui life's statutory solvency margin ratio (SMR) was 812.4% for the financial year ending March 2015 (FYE15). The core profit margin (excluding the impact of the variable annuity reserves) has continued to improve, to 7.0% from 6.3% at FYE14. Still, profitability is low compared with 'A' rated Japanese life insurers, due to a persisting negative spread burden.

The company's embedded value shows the highest sensitivity to potential interest-rate movements among the Japanese life insurers which disclose embedded value. Fitch sees this as due to a persisting duration mismatch between assets and liabilities, and exposure to foreign currency-denominated policies. The company says it has been working to narrow the duration mismatch

The Positive Watch reflects Fitch's expectation that Mitsui Life's financial profile is likely to benefit from being a part of Japan's largest private insurer and financially stronger group. Fitch will consider the strategic importance of Mitsui Life within the Nippon Life Group, and Mitsui Life's financial performance, upon the completion of the transaction which is expected by end-March 2016. Fitch expects to upgrade Mitsui Life's rating by between one to a maximum of two notches.

To maintain Mitsui Life's strong ties with Mitsui Group, Nippon Life also agreed with certain Mitsui Group members such as Sumitomo Mitsui Banking Corporation (IDR: A/Stable) regarding their re-acquisition of approximately 17% on aggregate of Mitsui Life's shares after the transaction.

RATING SENSITIVITIES
An upgrade is likely on completion of the acquisition, depending on further analysis of the strategic importance of Mitsui Life within the Nippon Life Group.

A downgrade of Mitsui Life is unlikely, given Fitch's view that it will maintain sufficient capitalisation based on the moderate investment risks and declining risk associated with minimum guarantees of variable annuity products.