(The following statement was released by the rating agency)
Sept 26 - Fitch Ratings has affirmed Fukoku Mutual Life Insurance Company’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 EUR300m fixed- to floating-rate subordinated callable notes due on 28 September 2025 at ‘BBB’.
The ratings reflect Fukoku Life’s stable life insurance underwriting and solid capitalisation. Its core profit margin has been stable at over 10% for more than last five years, supported by its focus on the profitable third (health) sector. In addition, the company has continued to reduce its exposure to high-risk assets such as domestic equities. As a result, Fukoku Life’s new statutory solvency margin ratio (SMR) improved, despite a weak domestic equity market, to 741.1% at end-March 2012 from 668.4% at end-March 2011. Fukoku Life has also reduced its investment exposure to European peripheral five countries to JPY11.4bn at end-March 2012 from JPY21.4bn at end-September 2011.
Fitch notes that Fukoku Life’s profitable third sector’s annualised premium in force grew 1.7% in the fiscal year ended March 2012, which is higher than that of most peers. The agency estimates about half of Fukoku Life’s total insurance underwriting profits are generated from its growing third sector products. The company’s surrender and lapse rate declined to 5.48% at end-March 2012 from 5.61% at end-March 2011.
To better manage risk and cope with the new solvency regime in Japan based on economic capital, the company is strengthening its enterprise risk management (ERM) and is steadily reducing the duration gap between its assets and liabilities. Negative spread has steadily narrowed to JPY6.8bn at end-March 2012 from JPY8.3bn at end-March 2011 and is likely to turn positive by around 2017.
Positive rating action may be considered if the SMR is maintained at well above 700%, or if Fitch’s own assessment of capital adequacy improves further on a sustained basis. Further growth in the company’s profitable third sector or further improvement in the surrender and lapse rates of death protection products would also be viewed positively by Fitch.
Negative rating action may result from material erosion of capitalisation and deterioration in core profit, particularly if Fitch’s own assessment of capital adequacy drops sharply or the SMR declines below 600% for a prolonged period.
Fukoku Life was established in 1923. The company is one of Japan’s nine traditional life insurers, with a market share of 3% by amount of policies in force at end-March 2012.