Japan-Based Nippon Life Ratings Affirmed At #A+#; Proposed Subordinated Notes Rated #A-#

Stocks and Financial Services Press Releases Tuesday September 12, 2017 17:17
TOKYO--12 Sep--S&P Global Ratings

TOKYO (S&P Global Ratings) Sept. 12, 2017--S&P Global Ratings today said it has affirmed its 'A+' financial strength and counterparty credit ratings on Japan-based Nippon Life Insurance Co. (Nippon Life). The outlook on the ratings is stable. The affirmation reflects our assessment of the U.S. dollar-denominated subordinated notes that Nippon Life plans to issue in September 2017 as intermediate equity content that will benefit the Nippon Life Insurance group's capitalization. Based on this assessment, we have assigned our 'A-' issue rating to the proposed subordinated notes.

In addition, we have also affirmed our 'A-' ratings on the U.S. dollar-denominated subordinated notes that the insurer had issued in October 2012 and October 2014.

Nippon Life has yet to decide the total issuance amount and the coupon rate of the proposed subordinated notes, which have interest deferral features. The coupon will have a fixed rate until September 2027, after which it will switch to a floating rate. The issue rating on the proposed subordinated notes is two notches lower than the long-term counterparty credit rating on Nippon Life. The gap reflects subordination to senior creditors, as well as the issuer's ability to defer interest payments.

We regard Nippon Life's proposed subordinated notes as intermediate equity content based on the following: The term to maturity is 30 years, which is sufficiently long under our criteria; redemption is basically not allowed for 10 years from issuance; although the interest rate will be stepped up after 10 years, the step-up of the coupon will be moderate at 100 basis points; the issuer can defer interest payments at its discretion; and the notes' repayment at the time of liquidation is subordinated to other senior debt, including policy obligations.

We understand that mandatory deferral of interest will occur if Nippon Life's solvency margin ratio falls below 200%, in accordance with applicable regulatory requirements in Japan; when deferral of interest is required under future applicable regulatory requirements in Japan; or when the regulator issues a prompt corrective action order. We believe the issuer is highly likely to defer interest payments at its discretion before such capital deficiency occurs or before it faces the abovementioned regulatory actions. Accordingly, their mandatory interest deferral features are not a major factor in our ratings analysis of Nippon Life's proposed subordinated notes and our assessment of their equity content.

We affirmed our ratings on Nippon Life, which we consider a core operating company of the Nippon Life Insurance group, after assigning our issue rating to the insurer's proposed U.S. dollar-denominated subordinated notes. The insurer plans to use the funds raised for long-term investments and working capital. Our assessment of the group's credit profile reflects its very strong business risk profile and strong financial risk profile. In our view, the planned subordinated bond issuance--together with an issuance of yen-denominated subordinated notes that the insurer had made in April 2017, which we also consider as having intermediate equity content--will benefit the group's capitalization. However, we maintain our assessment of the group's capital and earnings as strong. This reflects the following views derived from our capital model results: (1) total adjusted capital includes a relatively large amount of weaker types of capital; and (2) the group could be exposed to higher interest-rate risk than that captured in our capital model. We think the planned subordinated bond issuance will have limited negative effects on the group's financial leverage and fixed-charge coverage ratio.

The stable outlook on our ratings on Nippon Life reflects our view that the Nippon Life Insurance group is likely to retain its very strong business risk profile. Under our base-case scenario, we assume that the insurer's capital will remain strong through gradual capital enhancements, supported by relatively stable profits and issuances of hybrid instruments.

We hold the view that Nippon Life's capital position may face some volatility stemming from the domestic stock market due to its high exposure to equity investments. The ratings on Nippon Life are constrained by the sovereign ratings because both its business franchise and assets are highly concentrated in Japan.

We may lower the ratings on Nippon Life if we downgrade Japan. We may also downgrade Nippon Life if the financial market deteriorates as sharply as it did in the 2008 global financial crisis and significantly drags down the insurer's capital for a prolonged period. However, we consider this scenario as unlikely in the next two years. Conversely, we believe the likelihood of an upgrade for Nippon Life is limited as long as our sovereign ratings on Japan remain at the current level.

This is because our ratings on the company are at   the same level as our sovereign ratings on Japan.

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