OREANDA-NEWS. Fitch Ratings has conducted its peer review committee on nine Japanese life insurers including The Dai-ichi Life Insurance Company, Limited (Dai-ichi Life). The agency has affirmed Dai-ichi Life's Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has 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 level at 740.1% at end-September 2015, but had dropped from 834.4% a year earlier 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), which is considerably more than other Japanese life insurers.

However, 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 because Dai-ichi Life has a high level of government debt holdings (29% of its consolidated assets at end-September 2015) that the company's international diversification is still not big enough to offset.

Fitch sees capital adequacy as remaining susceptible to both interest-rate and stock-market volatility due to its duration mismatch between assets and liabilities, and high investment exposure to domestic equities (equity to adjusted equity of 130% at end-September 2015).

Dai-ichi Life's (standalone basis) annual in-force premiums from the third sector rose by 3.1% in the first half of FYE16 (1HFYE16) after increasing by 3.0% 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 value of gross sales revenue (equivalent to value of new business in embedded value) in 1HFYE16. Its consolidated underwriting profit is likely to continue to expand steadily, supported by the stable growth in the third sector and the growing international businesses.

Dai-ichi Life Group (including The Dai-ichi Frontier Life Insurance Co., Ltd. and The Neo First Life Insurance Company, Limited) has a market share of 15% in the Japanese life insurance market by value of policies in force as of end-March 2015.

RATING SENSITIVITIES
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 were to decline below 600%, consolidated financial leverage rises above 25% (5% at end-March 2015), or its (standalone basis) core profit margin were to decline to below 10% (14% in FYE15), for a prolonged period.