Earnings growth among Japan's nine standalone traditional life insurers is expected to continue to stall in the financial year ending March 2019 (FY19), says Fitch Ratings.
This is due mainly to persistently low bond yields in Japan, shrinking death-protection products because of Japan’s contracting population, and reduced premium rates based on the updated standard mortality table from April 2018.
Meanwhile, the most profitable “third” (health) sector continues to grow steadily (up 4% yoy in FY18).
In its report, Japanese Life Insurance Dashboard FY2018, Fitch says that Japanese life insurance groups’ global consolidated earnings will remain strong, supported by continuous expansion in their international insurance businesses after some major life insurers acquired medium-sized US and Australian life insurers to achieve earnings growth outside Japan and to diversify business risks.
Fitch considers that the major life insurers will continue to seek overseas growth opportunities. They are continually accumulating regulatory capital partly through hybrid debt issuance to cope with substantial overseas acquisitions, by taking advantage of extremely low bond yields worldwide and investors’ appetite for yield.
Fitch makes the additional observations:
Foreign bonds boosted further: Fitch believes that Japanese lifers will continue to increase their investment allocation to foreign bonds – with some currency hedging – to seek higher yields. The major firms had increased their foreign securities exposure to 28% of their total invested portfolio by end-March 2018, from 27% a year earlier.
Currency-hedging costs in yen/US dollars have become more expensive, so Fitch sees most lifers as effectively raising their exposure to currency risk (increasing unhedged positions) and/or increasing their allocation to foreign-currency fixed-income assets such as euro-denominated bonds rather than US dollars. In addition, some insurers may be accumulating illiquid assets such as loans to infrastructure projects – again, in order to seek higher yield.
Interest rate risk remains: Fitch expects interest-rate risk to remain the primary risk as most Japanese life insurers are unlikely to lengthen asset duration aggressively (due to persistently low bond yields in Japan) despite the duration gap between assets and liabilities.
Capital adequacy strong: The life insurers’ capital adequacy is likely to remain sufficient for their ratings, due to accumulated core capital and effective use of hybrid debt. The aggregate statutory solvency margin ratio had improved to 922% by end-March 2018.
Ratings Impact: Neutral. Fitch does not see life insurers’ credit fundamentals worsening, despite continuously low Japanese fixed-income yields. This is due mainly to their stable profit stream from the seasoned and continuously growing in-force portfolio of “third” sector products.