OREANDA-NEWS. Fitch Ratings has conducted its peer review committee on nine Japanese life insurers including Nippon Life Insurance Company (Nippon Life). The agency has affirmed the company's Insurer Financial Strength (IFS) Rating at 'A' and its Long-Term Issuer Default Rating at 'A', with a Stable Outlook. Fitch has also affirmed the company's subordinated notes due 2042 and 2044 at 'A-'.

KEY RATING DRIVERS
Nippon Life's IFS Rating is currently constrained by Japan's Long-Term Local-Currency IDR of 'A' with a Stable Outlook, and rated one notch below its unadjusted IFS Rating of 'A+'. Fitch does not allow Nippon Life's rating to be above that of the sovereign, given the company's high level of government debt holdings - 30% of invested assets as of end-March 2015(FYE15) - and its lack of business diversification outside Japan.

Nippon Life's ratings are supported by a market leading position in Japan's individual life industry; high-quality capital; low leverage and stable operating performance. However, capital adequacy remains highly susceptible to stock-market volatility due to its very high investment exposure to domestic equities (risky assets to adjusted equity of 125% at FYE15).

Nippon Life's capital adequacy will remain sufficient, despite the planned acquisition of Mitsui Life Insurance Company Limited (IFS: BBB+/Rating Watch Positive) and Australia's MLC Limited (MLC), for approximately JPY500bn.

The acquisition of MLC is in line with Nippon Life's strategy to boost growth by strengthening its overseas insurance business. However, operational integration risk, and successful management and governance of MLC Life will be crucial for Nippon Life to maximise the benefits from the acquisition, which is Nippon Life's first acquisition of a majority stake in an overseas company.

Fitch expects Nippon Life's core profit margin to be stable, underpinned by substantial mortality and morbidity margins. Higher investment gains contributed to strong core profit growth of 14.6% yoy in FYE15, widening the core profit margin to 12.7%.

RATING SENSITIVITIES
An upgrade of Nippon Life is unlikely in the near future as the Insurer Financial Strength Rating is currently on a par with Japan's Long-Term Local-Currency IDR.

Key rating triggers that could lead to a downgrade include:
- A downgrade of Japan's Long-Term Local-Currency IDR
- A significant decline in the capital buffer - specifically, if SMR were to decline below 600% for a sustained period
- Decline in profitability due to a change in product mix - specifically, a decline in core profit margins to below 10% for a prolonged period.