OREANDA-NEWS. Fitch Ratings has affirmed Sompo Japan Nipponkoa Insurance Inc.'s (Sompo Japan Nipponkoa) Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has simultaneously affirmed the insurer's USD1.4bn step-up callable subordinated notes due 2073 at 'A-'.

KEY RATING DRIVERS
The rating action reflects Sompo Japan Nipponkoa's very strong market position in the Japanese non-life insurance market and its strong capitalisation. The company's large holdings of domestic equities act as counterweights in the assessment.

Sompo Japan Nipponkoa had a 27% share of the domestic non-life insurance market by net premiums written in the financial year ended March 2015 (FYE15), and Fitch assesses its solvency as strong. The company also reported robust regulatory solvency measures. Sompo Japan Nipponkoa has maintained its healthy underwriting profitability during the recent three years, due mainly to a sustained increase in motor insurance premiums. Fitch expects the trend to continue.

Sompo Japan Nipponkoa's largest underwriting risk stems from its catastrophe insurance, and the company has tried to improve its risk management by using both its reinsurance programme with strongly rated reinsurers and alternative risk transfer such as catastrophe bonds.

Exposure to domestic equity holdings remains a weakness, although efforts are being made to reduce its investments in high-risk assets. The equity holdings decreased in the first half of FYE16 partly as a result of the company's continuous reduction efforts, and management's goal is to continue to reduce the weight of these investments in its balance sheet.

Sompo Japan Nipponkoa is the largest company in the insurance group Sompo Japan Nipponkoa Holdings, Inc. (SOMPO Holdings). SOMPO Holdings' other main Japanese business is Sompo Japan Nipponkoa Himawari Life Insurance, Inc. (Himawari Life). Fitch believes that domestic life insurance will continue to be vital to SOMPO Holdings' performance. Himawari Life contributes more than a third of the group's adjusted earnings, and Fitch expects this trend to continue over the foreseeable future. Himawari Life's statutory solvency margin ratio remains high (1,744.2% at end-December 2015, up from 1,676.3% at end-March 2015), partly backed by limited exposure to high-risk assets.

SOMPO Holdings' international insurance business is also steadily expanding, due partly to the contribution from Sompo Canopius AG, which underwrites a diversified portfolio of business from its operations at Lloyd's and around the world. The contribution from its international operations exceeded 10% of the group's total adjusted earnings in FYE15.

Sompo Japan Nipponkoa's ratings are constrained by Japan's Long-Term Local-Currency IDR of 'A/Stable'. Consequently, Fitch applies compressed notching between the IDR and subordinated debt rating.

RATING SENSITIVITIES
Fitch would expect to return to standard notching should the sovereign rating be upgraded and the constraints relieved. The ratings on Sompo Japan Nipponkoa may also be upgraded if the company were to significantly broaden its global diversification. Conversely, the ratings on the insurer would also be likely to be lowered if the rating on Japan were lowered.

Rating triggers for a downgrade would include major erosion of capitalisation at SOMPO Holdings and deterioration in its adjusted earnings. The ratings may specifically come under pressure if SOMPO Holdings' consolidated group solvency margin ratio declines to below 500% (857.5% at end-December 2015) for a prolonged period. The ratings may also come under pressure if SOMPO Holdings' financial leverage were to rise above 28% (6% at end-September 2015), or the 'combined ratio' worsens to above 105% (93.5% in April to December 2015) on a sustained basis.