Earnings from foreign bonds helped boost core profits at four major Japanese life insurers in the fiscal year ended 31 March 2018 (FY2017), but low domestic interest rates will continue to pressure their investment yields, says Moody's Japan.
“On the other hand, the shift in product mix to counter low interest rates continues, and annualised net premiums (ANPs) from new third-sector insurance policies kept growing, while those from individual annuity policies dropped," said Soichiro Makimoto, a Moody's Vice President and Senior Analyst. "In addition, this gradual shift to higher-margin protection products will support the insurers' profitability."
The four life insurers are:
- Dai-ichi Life Insurance
- Meiji Yasuda Life Insurance
- Nippon Life Insurance
- Sumitomo Life Insurance.
Moody's conclusions are contained in its just-released report, "Dai-ichi, Meiji Yasuda, Nippon, Sumitomo Foreign bonds help boost core profit in fiscal 2017 but low domestic rates will continue to pressure investment yields".
All life insurers reported increases in their core profits for FY2017 compared with the prior year. Combined with higher dividends from stocks, income from their gradually increasing foreign bond investments— boosted by a weaker yen, especially against the euro—played a key role in improving their results.
Low interest rates will continue to pressure investment yields
Due to low domestic interest rates, the insurers are seeking yield overseas. However, this development can offset yield pressure in Japan only to a limited extent. The yen's depreciation in FY2017 increased the income from their overseas investments, as income flows are usually unhedged. Currency hedging costs are not included in the calculation of core profit, but they eat into bottom-line profit, says the report.
The insurers may also invest more in unhedged foreign bonds, depending on foreign exchange rates, but any increase will be gradual because their appetite for currency risk is limited.
Product mix shift to counter low rates continues
On an aggregate basis, annualised net premiums (ANPs) from new third-sector (medical) policies continued to grow, by 9% in FY2017. By contrast, those from individual annuity policies dropped 56% due to lower guaranteed interest rates for regular-premium individual annuities, following a reduction in standard interest rates in April 2017. This gradual shift to higher margin protection products from yen-denominated savings products will continue and support insurers’ profitability.
With new medical products and strong distribution control, Dai-ichi (combined with Dai-ichi Frontier Life Insurance) and Meiji Yasuda were the most successful of the four with respective increases of 22% and 17% in sales of third-sector products, in terms of ANPs from new policies. Meanwhile, at Nippon Life, combined with Mitsui Life Insurance Company Limited (A1 stable), third-sector product sales decreased 7%.
Economic capital increases
Moody's Japan also notes that embedded value (EV), which reflects economic capital (the numerator of the economic capital ratio), increased across the board, because increases in unrealised gains and retained earnings were larger than a decrease in the value of in-force policies due to a slight decline in domestic long-term interest rates at the end of March 2017 from a year earlier. Unrealised gains at the insurers grew because an increase in those from domestic stocks more than offset a decrease in those from foreign securities caused by higher foreign interest rates. Also, insurers continued to enhance their capital by issuing hybrid bonds in FY2017.