Sumitomo Life Insurance Company's core profit margin moderately improved to 12% in the financial year ended March 2024 (FYE2024), from 11% a year earlier, notes Fitch Ratings.
The improvement is attributed to reduced claim payments related to "deemed hospitalisations", following the government's easing of COVID-19 pandemic-related restrictions since May 2023. Still, the company's positive investment spread continues to stall, due partly to the burden of higher currency hedging costs.
Ratings affirmed
Fitch Ratings has affirmed Sumitomo Life's Insurer Financial Strength (IFS) Rating at 'A+' (Strong) and Issuer Default Rating (IDR) at 'A'. The outlook is ‘Stable’. At the same time, Fitch has affirmed the rating on Sumitomo Life's US-dollar subordinated debt at 'A-'.
The affirmation of Sumitomo Life's ratings reflects the insurer’s 'Favourable' company profile, and 'Very Strong' capitalisation and financial performance. The ratings also factor in Fitch’s view of Sumitomo Life's exposure to high-risk assets such as domestic equities, which most of its Japanese peers also face.
Aside from underwriting profitability, factors driving Sumitomo Life’s ratings include:
International Operations Growing Steadily: Sumitomo Life's international businesses are expanding faster than its domestic businesses. Insurance premiums rose by 23% at the international units in FYE2024 and were flat at the Japanese units. The annualised premium in force from outside Japan exceeded 30% of the total in FYE2024 after acquiring Singapore Life Holdings. Fitch estimates that the contribution from outside Japan, mainly from its US operations, is likely to steadily increase.
Capital Adequacy Remains 'Strong': Sumitomo Life is likely to maintain capital adequacy that is commensurate with its rating, in Fitch's view. Its consolidated statutory solvency margin moderately declined to 640% by end-March 2024, against 679% a year earlier, due partly to its international acquisition. Its consolidated economic value-based solvency ratio (ESR) has also moderately declined (173% at end-March 2024, from 209% at end-March 2023) for the same reason.
The ESR better reflects the valuation effects of rising interest rates, as it evaluates both investment assets and insurance liabilities on a market-value basis. In contrast, the solvency margin ratio — based on current accounting standards — uses book values to calculate insurance liabilities and market values for foreign investments. Sumitomo Life scored 'Strong' on the Fitch Prism Global Model for FYE2024, unchanged from FYE2023.
High Risky-Assets Exposure: Fitch expects Sumitomo Life's risky-asset ratio to remain higher than its ratio guidelines for the insurer's rating. The company is gradually increasing its exposure to credit risks to enhance investment yields within its capital buffer, and Fitch does not foresee a significant rise in the risky-asset ratio, which Fitch estimates was 151% at end-March 2024. The ratio of sovereign investments to capital was particularly high at 412% at end-March 2024, as the bulk of the investments are allocated to Japanese government bonds.
Interest-Rate Risk Contracting: Sumitomo Life faces interest-rate risk due to the duration mismatch in its assets and liabilities, but this risk is steadily decreasing. Its sensitivity to a 50bp change in interest rates declined to 1% of its European embedded value in FYE2024, from 3% in FYE23. Fitch expects the company to increasingly narrow the assets and liabilities duration gap, supported by a moderately rising yen bond yield.
'Favourable' Company Profile: Fitch ranks Sumitomo Life's company profile as 'Favourable' as a result of a 'Favourable' business profile and 'Neutral' corporate governance compared with other Japanese insurers. This is underpinned by its sizeable market position in the life insurance market, diversified business portfolio, and healthy business risk profile. The overseas businesses accounted for 14% of the group's adjusted core profit in FYE2024 and were mostly from the US life insurance subsidiary, Symetra Financial Corporation.