Japanese life insurance groups' consolidated earnings will remain strong, supported by firm profits from international insurance operations after some major Japanese life insurers acquired medium-sized US life insurers to achieve growth outside Japan and diversify business risks, says Fitch Ratings in a new report.
However, the stalling earnings growth among Japan’s nine major standalone traditional life insurers is expected to continue in the financial year ending March 2018 (FYE18). This would mainly be due to persistently low bond yields (0.5% on 20-year Japanese government bonds) in Japan, while mortality and morbidity gains are likely to be stable, despite Japan’s contracting population, backed by the steady growth of profitable health insurance (+4% yoy in FYE17).
Fitch considers that major Japanese life insurers will continue to seek overseas growth opportunities.
They are continuously accumulating regulatory capital partly through hybrid debt issuance to cope with sizeable overseas acquisitions, by taking advantage of extremely low bond yield worldwide and investors’ appetite for yield.
Interest rate risk
Fitch expects interest rate risk will remain the primary risk as most Japanese life insurers are unlikely to lengthen asset duration due to persistently low bond yields in Japan despite the duration gap between assets and liabilities.
The economic solvency ratio (ESR) of Japanese life insurers improved at FYE17, partly due to a steeper yield curve compared to FYE16. Fitch considers that Japan’s regulator is likely to introduce an economic value based solvency regime on internationally active insurance groups (IAIGs) from about 2020 when the IAIS introduces the Insurance Capital Standard.
Fitch believes Japanese life insurers will continue to increase their investment allocation to high-grade foreign bonds with some currency hedging to seek higher yield.
The major life insurers increased their foreign securities exposure to 27% of their total invested portfolio by end-March 2017, from 26% a year earlier.
The life insurers’ capital adequacy is likely to remain sufficient for their ratings, mainly due to accumulated core capital and effective use of hybrid debt. The aggregate statutory solvency margin ratio remained strong at 904% at end-March 2017, notes Fitch.
The rating agency does not see life insurers’ credit fundamentals worsening, despite continuously low Japanese fixed-income yields, mainly due to their stable profit stream from the seasoned in-force portfolio of profitable protection products.