OREANDA-NEWS. Fitch Ratings has affirmed Mitsui Sumitomo Insurance Company, Limited's (MSI) Insurer Financial Strength (IFS) Rating and its Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed the company's USD1.3bn 7% subordinated notes due 15 March 2072 at 'A-'.

Based on Fitch's group rating methodology, MSI is considered a core company of MS&AD Insurance Group (MS&AD Group), along with Aioi Nissay Dowa Insurance Co., Ltd (ADI) and Mitsui Sumitomo Aioi Life Insurance Co., Ltd. MSI is the largest operating entity for MS&AD Group.

KEY RATING DRIVERS
MSI's ratings reflects the MS&AD Group's strong business position in Japan, diversified underwriting, including the domestic life business and overseas business, satisfactory operating performance and adequate capitalisation maintained at the group level .

However, MSI's IFS rating is constrained by Japan's Long-Term Local-Currency Issuer Default Rating (IDR), which is 'A/Stable'. In Fitch's methodology, MSI's ratings cannot be above the sovereign's because of its large holdings of Japanese government bonds and limited net premium contribution from overseas (less than 20% in net premiums).

Fitch expects MSI's underwriting profit to remain satisfactory, as the company is raising premiums based on underwriting risks. The loss ratio, excluding the impact of natural catastrophe losses, improved to 54.3% in the first half of the financial year ending March 2016 (1HFY16), from 57.2% a year earlier. However, underwriting results are likely to remain volatile due to catastrophe exposures.

Fitch expects the MS&AD Group to maintain adequate capital buffers partly through the faster reduction of strategic shareholdings, although it acquired Amlin Plc for about GBP3.4bn. The MS&AD Group's consolidated statutory solvency margin ratio (SMR) was 796.0% at end-September 2015, largely unchanged from 803.9% at FYE15. However, the group's SMR is particularly sensitive to stock market performance, due to a heavy investment in domestic equities.

RATING SENSITIVITIES
Currently, MSI's IFS ratings is constrained by the Japan's Long-Term Local-Currency IDR, however Fitch may consider upgrading MSI's rating to above that of the sovereign by a maximum of one notch, if following triggers are met:
- Sustained contribution from business outside Japan, specifically more than 20% of net premium written sourced from abroad, coupled with
- Maintaining the MS&AD Group's score on Fitch's Prism Factor-Based Capital Model (FBM) at 'Strong' ('Strong' at FYE15).

Key rating triggers that could lead to a downgrade include:
- Significant weakening in MS&AD Group's capital, specifically a decline in the MS&AD Group's Prism FBM score calculated by Fitch to below 'Strong' for a prolonged period.
- Sustained deterioration in MSI and ADI's combined ratio to above 105% (both below 95% at 1HFYE16).
- If the rating on Japan were lowered, the ratings on the insurer are also likely to be lowered, unless the above-mentioned geographical diversification is achieved.