Japan's four major rated life insurers - Meiji Yasuda Life Insurance Company, Sumitomo Life Insurance Company, Dai-ichi Life Insurance Company and Nippon Life Insurance Company - have reported in their results for financial year 2024 ending 31 March 2025 that the unrealised losses on domestic bonds on an aggregated basis were more than four times higher at fiscal 2024 year-end than a year earlier.
According to a media release by Moody’s Ratings the rise reflects increased domestic interest rates, specifically in the 20-year and 30-year yields on Japanese government bonds (JGBs), which rose about 0.8 percentage points during fiscal 2024 and another 0.1-0.3 percentage points since the end of fiscal 2024. Because of the super-long tenor, a 1 percentage point rise results in a 20%-30% decline in 20–30-year JGB valuations, based on a simple duration analysis.
Life insurers hold significant amounts of 20–30-year JGBs to match their super-long-term policy liabilities. The rise in domestic interest rates has also adversely affected Japanese banks' security investments, especially regional banks with longer investment durations than megabanks, but the credit effects are manageable for both life insurers and regional banks.
Most rated Japanese life insurers generally have a very narrow duration gap as they have been reducing interest rate risks stemming from the duration gap to prepare for Japan's new economic capital regulation, which will be implemented from the end of March 2026.
Therefore, the effect on their economic capital from increases in long-dated JGB yields is not large, and hence their economic solvency ratios (ESRs) are generally not highly sensitive to interest movements. For instance, a 0.5 percentage point parallel shift in the domestic yield curve affected Dai-Ichi Life Holdings' ESR by 6 percentage points as of the end of September 2024.
Insurers hold large share of their JGBs bonds in held-to-maturity (HTM) or in accounts corresponding to policy reserves (asset liability management (ALM) account) which do not need to be marked to market based on accounting policies. Additionally, they have substantial unrealised gains on other securities, including domestic equities. As a result, unrealised losses on bonds in available-for-sale accounts were more than offset by these gains as of the end of fiscal 2024.
Nevertheless, insurers face the risk of impairment losses on bonds in HTM and ALM accounts if the bond values declines by 50% or more. Even then, the impairments would be merely accounting valuation losses with a limited effect on economic capital since the liabilities matched to the bonds would also decline by almost the same extent given the duration gap is very narrow.