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Fitch Ratings : rating actions on Japanese insurers on sovereign downgrade

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Fitch Ratings has revised Nippon Life’s outlook to stable from Positive and affirmed its insurer financial strength (IFS) rating. The ratings for Daido Life Insurance Company (Daido Life) and Mitsui Sumitomo Insurance Company, Limited’s (MSI) were also affirmed. A full rating breakdown is at the end of this comment.  

The rating actins follows Fitch’s downgrade of Japan’s Long-Term Local-Currency Issuer Default Rating to ‘A+’ from ‘AA-‘ with Negative Outlook on 22 May 2012.

In Fitch’s view, each of these Japanese insurers’ ratings are underpinned by their strong franchise, prudent capital and liquidity and, therefore, would not be impacted by the sovereign rating downgrade. None of these ratings are linked to direct or indirect government support.

In addition, Fitch does not expect the sovereign downgrade to have any significant impact on Japan’s capital market or economy.

Japanese government bond (JGB) yield has thus far remained low despite deteriorating sovereign creditworthiness. This is mainly supported by on-going strong demand from domestic investors. Fitch therefore does not expect a significant decline in JGB prices due to the sovereign downgrade and, consequently, substantial impairment to the insurers’ capital adequacy position.

In the case of Nippon Life, the change in Outlook reflects the remote prospect of an upgrade given its current rating is now at the same level as the sovereign’s Local Currency IDR, which is on Negative Outlook. Fitch does not rate the insurers more than a notch above the sovereign rating due to its concentrated business portfolio in Japan.

Tokio Marine & Nichido Fire Insurance’s (TMNF) rating (IFS ‘AA-‘/Stable) is not affected by this sovereign downgrade. Its rating can exceed Japan’s sovereign rating by a maximum of two notches due to its solid capitalisation, liquidity and franchise as well as Tokio Marine Group’s on-going global diversification.

Fitch may take negative rating action on the Japanese insurers if there is significant domestic capital market volatility and a severe recession.   The ratings actions are as follows:

– Nippon Life Insurance Co : IFS rating affirmed at ‘A+’; Outlook changed to Stable from Positive

– Daido Life : IFS rating affirmed at ‘A+’; Outlook Stable

– MSI : IFS rating affirmed at ‘A+’; Outlook Stable   Long Term Issuer Default Rating affirmed at ‘A+’; Outlook Stable

– USD1.3bn subordinated notes with deferral options due 15 March 2072 affirmed at ‘A-‘