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Moody's affirms Sompo Japan Nipponkoa ratings after US$6.3B deal announcement

Moody's Japan K.K. affirmed the ratings of subsidiary Sompo Japan NipponkoaInsurance Inc. following its Oct. 5 announcement to acquireEndurance Specialty HoldingsLtd. for approximately US$6.30 billion.

The rating agency affirmed the insurer's A1 insurancefinancial strength rating and A3 (hyb) subordinated bond rating.

The outlook remains stable.

The ratings action takes into account Sompo JapanNipponkoa's strong market position, product diversification, strong capitaladequacy and moderate financial leverage compared to global peers. Thestrengths are slightly offset by the company's modest operating profitabilitymetrics, Moody's noted.

The rating agency expects the deal to broaden the company'sproduct and geographic diversification outside of Japan. On the other hand, thedeal implies moderate weakening in the company's asset quality, considering thesizable amount of goodwill generated by the transaction.

An upgrade is unlikely since Sompo Japan Nipponkoa's ratingsare at the same level as that of the Japanese government. However, asustainable improvement in underwriting profit and greater earnings stability,as well as an increase in geographic diversification, could drive the ratingsupward.

Factors that could lead to a downgrade include operationalfailures associated with the acquisition, sizable claim payment due tocatastrophe losses a downgrade of Japan's sovereign rating.