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Fitch Affirms FWD Fuji Life's IFS Rating at 'BBB+'; Outlook Stable.

Tokyo/Hong Kong: Fitch Ratings has affirmed Japan-based FWD Fuji Life Insurance Company, Limited's Insurer Financial Strength (IFS) Rating at 'BBB+' (Good). The Outlook is Stable.


The rating takes into consideration FWD Fuji Life's good capital adequacy, strong investment risk management and good business profile. It also reflects the challenges the company faces, particularly its moderately weak financial performance under Japanese GAAP and sizeable interest rate risk from a duration mismatch between assets and liabilities. Fitch believes the company has maintained good capital adequacy and strong investment risk management, but it is also seeking to expand its underwriting businesses more aggressively and hold a less-conservative investment portfolio to achieve faster growth and higher investment returns.

Fitch considers FWD Fuji Life's capitalisation 'Good' with the company's capital score, in terms of Fitch's Prism Factor-Based Capital Model (FBM), in the 'Adequate' category at end-March 2018. The company's statutory solvency margin ratio (SMR) at end-March 2018 stood at 1,110% (1,213% a year earlier), and is likely to fall as FWD Fuji Life migrates gradually to a more diversified asset mix for higher investment yields. The insurer reported asset leverage of 27x at end-March 2018 (in line with the 'BBB' IFS Rating category). Fitch believes parent FWD Group is willing to inject additional capital into FWD Fuji Life when necessary.

The company is moving away from a prudent asset mix with the share of Japanese government bonds (JGB) declining to around 52% of its investment portfolio by end-March 2018 from 60% a year earlier. It plans to diversify its asset mix by reducing JGBs gradually to around 40% by 2021 and replace them with other credit products such as domestic corporate bonds and alternative investments. The company's risky-asset ratio increased to 83% by end-March 2018 from 3% a year earlier. Fitch will continue to monitor the company's exposure to risky assets, such as non-investment grade bonds, relative to its capitalisation.

The company's core profit margin based on Japanese GAAP remains negative mainly due to the new businesses associated with its strong growth. It is focusing on more profitable protection products including third (health) sector and corporate-owned life insurance (COLI) products. These products tend to have sound new business value margins if measured using the traditional embedded value method rather than Japanese GAAP.

FWD Fuji Life's annual premiums from in-force policies in the third sector increased by 19% during the year ended March 2018 (FYE18), which was stronger than most of its peers, due partly to effective sales promotion via agency channels. Fitch believes its efforts in marketing third-sector and COLI products through agency channels are likely to further sustain these segments' strengths.

The company faces sizeable interest rate risk due to its material duration mismatch. Fitch expects its duration mismatch to narrow moderately in the next few years, mainly driven by the continuous fast growth of the company's shorter duration insurance products.

FWD Fuji Life's market share (in terms of total sum insured for in-force policies and in-force third-sector annual premiums) in the Japanese life insurance market is small, well below 1% in FYE18.


The following could lead to an upgrade of FWD Fuji Life's rating:

- Substantial improvement in profitability; specifically if FWD Fuji Life's core profit margin improves to above 7% on a sustained basis.

- Significantly strengthened capitalisation; specifically if FWD Fuji Life's asset leverage improves to below 22x on a sustained basis, with Fitch's Prism FBM score well into the 'Strong' category.

- Increased market share to well above 1% with overall stronger credit fundamentals.

The following could lead to a downgrade of FWD Fuji Life's rating:

- A significant decline in the capital buffer; specifically, if FWD Fuji Life's asset leverage deteriorates to above 30x, or its SMR declines to well below 700%, with Fitch's Prism FBM score below the lower range of the 'Adequate' category, for a sustained period.

- Continued deterioration in profitability for a prolonged period.

- Significant increase in risky assets on a sustained basis.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 23, 2019
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