OREANDA-NEWS. Fitch Ratings has affirmed Fukoku Mutual Life Insurance Co's (Fukoku Life) Insurer Financial Strength (IFS) Rating at 'A' and its Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the company's USD500m cumulative perpetual subordinated notes issued in September 2013 and USD500m cumulative perpetual subordinated notes issued in July 2015 at 'BBB+'

KEY RATING DRIVERS
The ratings reflect Fukoku Life's solid capitalisation and stable 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.

Fukoku Life's market share is less than 5% in terms of the value of policies in force and the third sector's annual premium in force. Furthermore, its risky assets/adjusted equity stood at 96.4% at end-December 2015, which is higher than Fitch's median of 90% for the 'A' rating category.

Fukoku Life's statutory solvency margin ratio remained sufficient at 1,207.6% at end-December 2015 - the second-highest among Japanese traditional life insurers - compared with 1,169.3% at end-March 2015. This resulted mainly from large accumulated capital and reserves, high unrealised gains on securities, and its effective use of hybrid capital.

Annualised premium in force at Fukoku Life's third sector continued to grow at a modest rate of 0.8% in April to December 2015. This was lower than the industry growth rate of 2.2%, partly because the company protected its profit margin amid ongoing price competition. 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 was established in 1923, and is a Japanese traditional life insurer with a market share of 3% by value of policies in force at end-March 2015.

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 Issuer Default Rating (IDR) of 'A' with a Stable Outlook. Fukoku Life has a high level of government debt holdings (30% of invested assets at end-December 2015). The company has no overseas business diversification to counterbalance the Japanese government bond holdings. Conversely, if Japan's Long-Term Local-Currency IDR were lowered, the IFS Rating on the insurer would also be likely to be lowered.

Upgrade triggers for Fukoku Life's IDR and hybrid debt ratings would include the issuer 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, or reducing its risky assets/adjusted equity ratio to below 90% while maintaining sound profitability and capitalisation.

Downgrade triggers would include a substantial erosion of capitalisation and deterioration in profitability, in particular if the statutory solvency margin ratio falls below 600% or financial leverage rises to above 35% (11% at end-December 2015) for a prolonged period.