OREANDA-NEWS. Fitch Ratings has upgraded Asahi Mutual Life Insurance Co.'s (Asahi Life) Insurer Financial Strength (IFS) Rating to 'BB+' from 'BB'. The Outlook is Stable.

KEY RATING DRIVERS
The upgrade is based on Asahi Life's steadily improving capital adequacy and financial leverage as well as its resilient insurance underwriting, supported by the company's strategic focus on the profitable third (health) sector.

Its statutory solvency margin ratio (SMR) rose to 667.7% at end-March 2015 from 569.0% a year earlier, mainly due to its increased unrealised gains on securities and its accumulated capitalisation and reserves. Also, the company's financial leverage declined to 39.0% at end-March 2015 from 46.9% a year earlier, due to its strengthened capitalisation.

Asahi Life changed its capital structure through redeeming JPY120bn of its existing kikin (foundation funds), and raising JPY80bn of new kikin and JPY40bn of subordinated debt on 3 August 2015. In Fitch's view, this refinancing plan is sufficient to maintain the company's quantity and quality of capitalisation. The company's capital-related metrics, such as SMR and financial leverage, are not affected by this capital restructuring.

Nevertheless, Asahi Life's capital position is weak in comparison with its peers' average SMR of more than 900%. In addition, Asahi Life's negative spread burden of JPY64.9bn in the financial year ended March 2015 (FYE15) (FYE14: JPY71.1bn) 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.

The company's insurance underwriting business has been stable due to its effective focus on the more profitable third sector. Its core profit margin remained adequate at 6.8% in FYE15, compared with 6.6% a year earlier. Annual premiums of in-force policies in this segment increased by 2.4% in FYE15, partly due to effective sales promotions via non-traditional channels. Fitch believes that the company's efforts in marketing third-sector products via several non-traditional channels, such as telephone marketing, are likely to further enhance its strength in this segment.

RATING SENSITIVITIES
Key rating triggers for an upgrade include: a further strengthening of capitalisation; and a decline in financial leverage to below 35%, on a sustained basis. 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, or increase in financial leverage to above 45%, or significant deterioration in profitability, such as core profit margin falling to below 5%, on a sustained basis.