OREANDA-NEWS. Fitch Affirms Tokio Marine & Nichido at IFS 'A+'; Outlook Negative Tokyo Fitch Ratings has affirmed Japan-based Tokio Marine & Nichido Fire Insurance Co., Ltd.'s (TMNF) Insurer Financial Strength (IFS) rating at 'A+'. The Outlook is Negative. TMNF is a core company of a consolidated Tokio Marine Holdings, Inc. (TMHD).

KEY RATING DRIVERS

The IFS rating reflects Fitch's expectation that TMHD will maintain its solid capitalisation and robust franchise. TMHD's financial metrics have remained strong. TMHD maintained its consolidated statutory solvency margin ratio (SMR) at a sound level of 791% at end-March 2016 from 781% a year earlier. TMNF's net leverage remained low at 1.9x at end-March 2016, unchanged from a year earlier.

The acquisition of US-based HCC Insurance Holdings, Inc. (HCC; its core insurance operating companies' IFS Ratings AA-/Negative), which was completed in October 2015, should enhance TMHD's global diversification with some synergy effects among the insurance operating companies in TMHD. Its overseas insurance premiums and business unit profits will be about 35% and 43%, respectively, of the TMHD's total in the financial year to 31 March 2017 (FYE17), according to TMHD's estimate.

Fitch expects any negative impact from the United Kingdom's vote to exit from the European Union to be limited and manageable, mainly because the majority of TMHD's international insurance businesses are derived from the US, including HCC, Philadelphia Consolidated Holding Corp. and Delphi Financial Group, Inc. Its insurance premiums and business unit profits from US markets will be about 62% and 81%, respectively, of the TMHD's international total in FYE17, according to TMHD's estimate.

Fitch assesses TMNF's unadjusted IFS rating at 'AA-', but the adjusted IFS rating is constrained by Japan's sovereign rating. Fitch allows the company's rating to be above that of the sovereign by up to one notch, because TMHD's substantial international diversification counterbalances its large holdings of Japanese government debt (about 31% of TMHD's assets at end-March 2016). Japan's Long-Term Local-Currency Issuer Default Rating is 'A' with Negative Outlook.

The TMHD's biggest weakness is its domestic equity holdings, which formed about 11% of its assets at end-March 2016. However, TMNF plans to reduce its domestic equity investments by more than JPY100bn (about 4% of the holdings) in FYE17.

TMNF is likely to maintain a healthy profitability in FYE17 as the company plans to hold premium rates steady. TMNF's combined ratio (excluding "no-loss, no-profit" products) improved to 89.2% in FYE16 from 89.8% in FYE15, partly because it continued to raise premium rates at its motor insurance business. F, TMHD's domestic life insurance business is expanding strongly, with the annual premium in force of the profitable "third" (health) sector increasing 14% in FYE16, and this should help support the TMHD's credit profile.

RATING SENSITIVITIES

An upgrade is unlikely in the near future, given the rating is constrained by Japan's Long-Term Local-Currency IDR of 'A' with a Negative Outlook. Conversely, if the rating on Japan were lowered, the ratings on the insurer are also likely to be lowered.

Rating triggers for a downgrade include a material erosion of capitalisation caused by a major natural disaster and/or financial crisis, the TMHD's consolidated SMR declining below 600%, deterioration in TMNF's net leverage to above 4x, or an unexpected surge in the combined ratio, over a sustained period.