November 21, 2017 / 6:45 AM / a month ago

Fitch Affirms Fukoku Life at IFS Rating 'A'; Outlook Stable

(The following statement was released by the rating agency) TOKYO/HONG KONG, November 21 (Fitch) Fitch Ratings has affirmed Fukoku Mutual Life Insurance Company's (Fukoku Life) Insurer Financial Strength (IFS) Rating at 'A' (Strong) and its Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the company's US dollar-denominated subordinated notes at 'BBB+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The ratings reflect Fukoku Life's very strong capitalisation and robust life insurance underwriting business with a successful focus on the more profitable third (health) sector. These strengths are offset by a smaller market share than its larger rivals, the four major life insurers in Japan, and interest rate risk derived from a duration mismatch between assets and liabilities. Fukoku Life's market share is less than 5% (3% at end-March 2017) in terms of the value of policies in force and the third sector's annual premium in force. Furthermore, its risky assets/adjusted equity rose to 103% at end-March 2017 from 88% a year earlier, which is higher than Fitch's median of 90% for the 'A' rating category. Fukoku Life's statutory solvency margin ratio (SMR) remained very strong at 1,215% at end-March 2017 - the second highest among Japanese traditional life insurers - compared with 1,322% a year earlier. The high ratio is a result of large accumulated capital and reserves, high unrealised gains on securities, and its effective use of hybrid capital. Fukoku Life reported a core profit margin of 15% in the financial year ended March 2017 (FYE17), a level it has maintained for the past four years, which is much higher than Fitch's median of 8% for the 'A' rating category. Annualised premium in force at Fukoku Life's third sector continued to grow at a modest rate of 2% in FYE17, which was lower than the industry growth of 4%. However, the company has protected its profit margin amid ongoing price competition, unlike some peers, which have reduced their premium rates moderately. Fukoku Life estimates that about half of its insurance underwriting profit is generated from its third-sector products and Fitch expects this proportion to continue to increase. Fukoku Life faces interest-rate risk due to the duration mismatch in its asset-liability management. Fitch expects the company to narrow the gap at a slower pace for the time being, mainly because bond yields have remained extremely low in Japan (eg the 20-year Japanese government bond yield is around 0.5%). The agency, however, believes the company continues to retain a sufficient capital buffer to absorb interest-rate risk. RATING SENSITIVITIES An upgrade of Fukoku Life's IFS Rating is unlikely in the near future even though its credit fundamentals are stronger than those of most Japanese traditional life insurers. This is because the rating is constrained by Japan's Long-Term Local-Currency IDR of 'A' with a Stable Outlook. Fukoku Life has not diversified overseas to counterbalance its high level of government debt holdings (31% of invested assets at end-March 2017). Conversely, if Japan's Long-Term Local-Currency IDR were lowered, the IFS Rating on the insurer would also likely be lowered. The following could lead to an upgrade of Fukoku Life's IDR and hybrid debt ratings: - A reduction in its risky assets/adjusted equity ratio to below 90% for a prolonged period, while maintaining sound profitability and capitalisation. - Or, achieving a larger market share (in terms of the value of policies in force and the third sector's annual premium in force) and a major position in the local life insurance market. The following could lead to a downgrade of Fukoku Life's ratings: - A significant decline in the capital buffer - specifically, if Fukoku Life's SMR declines to well below 600% or financial leverage rises to above 35% for a sustained period (11% at end-March 2017). - A decline in Fukoku Life's profitability - specifically, a decline in core profit margin to below 8% (15% in FYE17) for a prolonged period. FULL LIST OF RATING ACTIONS Fukoku Mutual Life Insurance Company: --IFS Rating affirmed at 'A'; Outlook Stable, --Long-Term IDR affirmed at 'A-'; Outlook Stable, --USD500 million cumulative perpetual subordinated notes with interest deferral options issued in September 2013 affirmed at 'BBB+' --USD500 million cumulative perpetual subordinated notes with interest deferral options issued in July 2015 affirmed at 'BBB+' Contact: Primary Analyst Teruki Morinaga Director +81 3 3288 2781 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Secondary Analyst Akane Nishizaki Associate Director +852 2263 9942 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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