Fitch Affirms Fukoku Life at IFS Rating 'A'; Outlook Stable
KEY RATING DRIVERS
The ratings reflect solid capitalisation and a stable life insurance underwriting business with its 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 93.7% at end-September 2015, which is still higher than Fitch's median factor of 90% for the 'A' rating category.
Fukoku Life's statutory solvency margin ratio (SMR) had improved to 1,224.0% by end-September 2015 - the second-highest among Japanese traditional life insurers - from 1,129.2% a year earlier. This resulted mainly from larger accumulated capital and reserves, higher 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 0.7% yoy in the first half of the financial year ending March 2016 (1HFYE16). This is moderately low compared with the industry growth rate of 2.3%, partly because the company is protecting 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 contribution to continue to increase.
Fukoku Life was established in 1923, and is the seventh-largest Japanese traditional life insurer, with a market share of 3% by value of policies in force at end-March 2015.
An upgrade of Fukoku Life's IFS Rating is unlikely in the near future despite Fukoku Life's stronger credit fundamentals than those of most Japanese traditional life insurers, given the constraint of the sovereign rating. Japan's Long-Term Local-Currency Issuer Default Rating (IDR) is 'A' with a Stable Outlook, and Fukoku Life has a high level of government debt holdings (30% of invested assets at end-September 2015). The company has no overseas business diversification to counterbalance the Japanese government bond holdings. Conversely, if the rating on Japan were lowered, the IFS Rating on the insurer would also be likely to be lowered.
Upgrade triggers for the 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 SMR falls below 600% or financial leverage rises to above 35% (11% at end-September 2015) for a prolonged period.