OREANDA-NEWS. June 30, 2015. Fitch Ratings has upgraded Mitsui Life Insurance Company Limited's (Mitsui Life) Insurer Financial Strength (IFS) Rating to 'BBB+' from 'BBB'. The Outlook is Stable.

KEY RATING DRIVERS

The upgrade is based on Mitsui Life's improved capital adequacy and turnaround in the new sales of lucrative medical and healthcare products (known as "third-sector" products in Japan). The rating reflects Fitch's expectation that the company will maintain sufficient capitalisation for its rating category, based on moderate investment risks and declining risk associated with minimum guarantees of variable annuity products. These strengths are offset by relatively low core-profit margins and a high degree of sensitivity of its embedded value to potential movements in interest rates.

Mitsui Life's statutory solvency margin ratio (SMR) continued to improve to 812.4% for the financial year ending March 2015 (FYE15), from 648.5%, due largely to favourable market performance - and, to a lesser extent, a gradual recovery in adjusted equity and lower minimum guarantee risk. Mitsui Life's risky assets/adjusted equity is sufficient for its current rating category (103.9% at FYE15). However, Fitch believes that improvement in the ratio is likely to be slower in the near term - considering that adjusted equity is likely to continue rising only modestly, and with our expectation that company will maintain the current exposure to domestic equities.

The core profit margin (excluding the impact of the variable annuity reserves) has continued to improve, to 7.0% from 6.3% at FYE14. Still, profitability is low compared with 'A' rated Japanese life insurers, due to a persisting negative spread burden. Mitsui Life's business in-force has been falling faster than that of the industry, and Fitch believes mortality gains could deteriorate without the turnaround in the sales of protection-type products including the medical and healthcare products. The company posted a 0.9% growth in annualised new sales premiums for the third-sector products for the first year in five years in FYE15, while the in-force premium of the third-sector products also rose marginally.

Company's embedded value shows the highest sensitivity to potential interest-rate movements among the Japanese life insurers which disclose embedded value. Fitch sees this as due to persisting duration mismatch between assets and liabilities and exposure to foreign currency-denominated policies. Mitsui Life has been working to narrow the duration mismatch.

RATING SENSITIVITIES
Key ratings triggers that could result in an upgrade include:
- Further improvement in profitability; widening core profit margins excluding the impact of a change in variable annuity reserves at around 8% for a sustained period.
- An improvement in capital adequacy through accumulation of core capital.

Key ratings triggers for a downgrade include:
- Significant decline in capital buffer, specifically in the SMR below 500% for a sustained period, or if the company's Prism FBM score falls significantly below 'Adequate' for a prolonged period of time. Mitsui Life's Prism factor-based modem (Prism FBM) score was 'Strong' based on FYE15 results.
- Deterioration in profitability, i.e. core profit margin (excluding the impact of a change in variable annuity reserves) falls below 6% for a sustained period.