OREANDA-NEWS. Fitch Ratings has assigned Fukoku Mutual Life Insurance Company's (Fukoku Life) recently announced USD500m cumulative perpetual subordinated notes a 'BBB+' rating.

Fitch has simultaneously affirmed the insurer's Insurer Financial Strength (IFS) Rating at 'A' and its Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also upgraded the company's EUR300m fixed- to floating-rate subordinated callable notes due on 28 September 2025 and USD500m cumulative perpetual subordinated notes issued in September 2013 to 'BBB+' from 'BBB'.

KEY RATING DRIVERS

The three subordinated notes are rated one notch below Fukoku Life's Long-Term IDR to reflect their subordination and non-performance risk, based on Fitch's updated notching criteria.

Fitch has made a 'Below Average' baseline recovery assumption for these notes, reflecting their level of subordination, which results in the ratings being notched down one from the IDR. The agency assesses these notes' non-performance risk as 'Minimal', because mandatory interest deferral is triggered only when the Fukoku Life's Japan statutory solvency margin ratio (SMR) reaches 200%. This results in zero additional notching for non-performance risk.

Fitch published updated insurance notching criteria, which appear in Section VI of the insurance master criteria report "Insurance Rating Methodology" dated 14 July 2015, following publication of an initial exposure draft of proposed criteria on 12 May 2015.

All three notes are recognised by the regulator as capital under Japan's statutory solvency margin. This leads Fitch to assign the notes 100% equity credit for the agency's internal capital adequacy metrics.

The newly issued USD500m note is treated as 50% equity and 50% debt in Fitch's assessment of Fukoku Life's financial leverage because it is perpetual and cumulative, without any features that would negate this favourable treatment. Fitch expects the note to have raised Fukoku's financial leverage to 14% from 12% on a pro-forma basis as of end-March 2015, which is still an appropriate level for its IFS 'A' rating.

The existing USD500m note is also treated as 50% equity and 50% debt in Fitch's assessment of Fukoku Life's financial leverage - the terms and conditions are essentially the same as the newly issued note. The existing EUR300m note is treated as 100% debt because it is a dated note.

Fukoku Life's ratings reflect its solid capitalisation and stable life insurance underwriting business with its successful focus on the more profitable third (health) sector. These strengths are offset by its relatively smaller market share compared with its larger rivals, the four major life insurers in Japan.

Fukoku Life has a market share of less than 5% in terms of value of policies in force and the third sector's annual premium in force. Furthermore, its risky assets to adjusted equity stood at 96% at end-March 2015, which is higher than Fitch's median of 90% for the 'A' rating category.

Fukoku Life's SMR improved to 1,169.3% at end-March 2015 - the second-highest among Japanese traditional life insurers - from 1,099.9% a year earlier. This mainly resulted from larger accumulated capital and reserves, increased unrealised gain on securities and its effective use of hybrid capital.

RATING SENSITIVITIES

An upgrade of Fukoku Life's IFS Rating is unlikely in the near future despite its stronger credit fundamentals, given the constraint of the sovereign rating. Japan's Long-Term Local-Currency Issuer Default Rating (IDR) is 'A' with a Stable Outlook. This is because Fukoku Life has a high level of government debt holdings (31% of invested assets at end-March 2015), which is not counterbalanced by overseas business diversification. If the rating on Japan were lowered, the IFS Rating on the insurer is likely to be lowered.

Upgrade triggers for the company's IDR and hybrid debt ratings include the issuer achieving a larger market share (in terms of value of policies in force and the third sector's annual premium in force) and a major position in the local life insurance market, or reducing its risky assets to adjusted equity ratio to below 90% while maintaining sound profitability and capitalisation levels.

Downgrade triggers include material erosion of capitalisation and deterioration in profitability, in particular if the SMR falls below 600% or financial leverage increases to above 35% (11.6% at end-March 2015) for a prolonged period.