September 6, 2017 / 1:49 AM / a year ago

Fitch Rates Sumitomo Life's Proposed Subordinated Notes 'A-(EXP)'

(The following statement was released by the rating agency) HONG KONG/TOKYO, September 05 (Fitch) Fitch Ratings has assigned an 'A-(EXP)' rating to Sumitomo Life Insurance Company's (Sumitomo Life; Insurer Financial Strength (IFS) rating and Long-Term Issuer Default Rating (IDR) at A/Stable) proposed US dollar step-up callable subordinated notes with interest deferral options due 2077. The issuance ranks pari passu with Sumitomo Life's outstanding US dollar subordinated notes rated by Fitch, and are rated at the same level as the outstanding notes. The total issuance amount and coupon of the subordinated notes have yet to be decided. The notes are callable after 10 years, at which point there would be a floating rate with coupon step-up feature. Sumitomo Life expects to use proceeds from the issuance for general corporate purposes. The final rating is contingent on the receipt of final documents conforming to information already received. KEY RATING DRIVERS The new subordinated notes are rated one notch below Sumitomo Life's IDR to reflect Fitch's assumption of below-average recovery prospects in the event of default, given the level of subordination. The notes will be subordinated to all senior indebtedness of Sumitomo Life and will rank pari passu with foundation funds (kikin). There is no additional notching for non-performance risk, as Fitch views this risk as "minimal" under the agency's criteria. The notes include a mandatory interest deferral feature on cumulative basis, which will be triggered when Sumitomo Life's consolidated or non-consolidated statutory solvency margin ratio (SMR) declines below the regulatory capital requirement of 200%, or on the issuance of an order of prompt corrective action by Financial Services Agency of Japan. The company's SMR were 832% and 839%, on consolidated and non-consolidated basis, respectively, at end-June 2017. The subordinated notes are afforded equity credit for regulatory solvency purposes, and Fitch has applied its "regulatory override". Therefore, Fitch classifies these notes as 100% equity capital within the agency's assessment of risk-based capital adequacy. However, these notes are dated, and are therefore classified as 100% debt for the agency's financial leverage calculations. Sumitomo Life redeemed JPY70 billion of kikin in July. Thus Fitch is of the view that issuance of this proposed subordinated notes will have a limited impact on the company's financial leverage. Fitch estimates Sumitomo Life's consolidated financial leverage, including this issuance, would have been below 25% at end-June 2017. This is stronger than median 28% for 'A' rated issuers, based on Fitch's methodology. Fitch also expects Sumitomo Life's fixed-charge coverage to remain strong and commensurate with its ratings, even after this subordinated bond issuance. RATING SENSITIVITIES An upgrade of Sumitomo Life is unlikely in the near future as the company's IFS rating is constrained by Japan's Long-Term Local-Currency IDR (A/Stable). However, the ratings on the subordinated notes would remain at 'A-', if the Sumitomo Life's IFS rating and IDR were downgraded to 'A-' due to downgrade of Japan's IDR. The ratings on the subordinated notes would be downgraded if Sumitomo Life's ratings were downgraded due to deterioration in own credit profile. The following could lead to a downgrade of Sumitomo Life's ratings: - A significant decline in the capital buffer; specifically, if the consolidated solvency margin ratio declines below 700% for a sustained period - A rise in Sumitomo Life's consolidated financial leverage to over 30% on a sustained period - Decline in profitability for a prolonged period - Increased volatility of the insurer's embedded value Contact: Primary Analyst Akane Nishizaki Associate Director +852 2263 9942 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Teruki Morinaga Director +81 3 3288 2781 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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