OREANDA-NEWS. April 27, 2015. Fitch Ratings has affirmed Japan-based Asahi Mutual Life Insurance Co.'s (Asahi Life) Insurer Financial Strength (IFS) rating at 'BB'. The Outlook is Positive.

KEY RATING DRIVERS

The IFS rating reflects Asahi Life's steadily improving but still-weak capital adequacy compared with its peers' as well as its resilient insurance underwriting, supported by the company's strategic focus on the profitable third (health) sector. This is partly offset by moderately shrinking - but still sizeable - negative spread burden, which will continue to hurt the financial performance of the company.

Asahi Life's capital adequacy and financial leverage continue to improve, which underpin the Positive Outlook on the IFS rating. Its statutory solvency margin ratio (SMR) rose to 638.9% at end-December 2014 from 569.0% at end-March 2014, mainly due to its increased unrealised gains on securities and its accumulated capitalisation and reserves. Also, the company's financial leverage declined to 41.6% at end-December 2014 from 46.9% at end-March 2014, thanks to its strengthened capitalisation.

The company's insurance underwriting business has been stable due to its effective focus on the more profitable third sector. Annual premiums of in-force policies in this segment increased by 1.4% during the first nine months in the financial year ended March 2015 (FYE15), partly due to the effective sales promotions via non-traditional agencies channels. Fitch believes that the company's efforts in marketing third-sector products via several non-traditional channels, including banks, are likely to further enhance its strength in this segment.

Nevertheless, in comparison with its peers' average SMR of more than 900%, Asahi Life's capital position is weak. In addition, Asahi Life's negative spread burden of JPY71.1bn in FYE14 (FYE13: JPY80.3bn) is large and continues to offset gains from better-than-projected mortality and morbidity rates. However, Fitch expects Asahi Life's negative spread burden to shrink as a consequence of gradually declining average guaranteed yields over the medium term.

Asahi Life is the seventh-largest traditional domestic life insurer in Japan with a 3% market share by value of policies in force at end-March 2014.

RATING SENSITIVITIES

Key rating triggers for an upgrade include: a further strengthening of capitalisation, particularly if the SMR remains well above 400%; further improvement in Fitch's internal capitalisation measure; a decline in financial leverage (with kikin treated as debt) to below 45%, on a sustained basis; and maintenance of the good quality of its capital through the restructuring of its capitalisation. Growth in the company's third-sector business and reduction in the surrender and lapse rates of its death protection products would also be viewed positively by Fitch.

Key rating triggers for a downgrade include: material erosion of capitalisation, specifically, a decline in the SMR to below 300% or deterioration in Fitch's internal capitalisation measure on a sustained basis. Significant deterioration in profitability would also put the rating under pressure.