Japanese life insurers set to benefit from rising bond yields

Written by Adam Cadle

07/08/2023

Japanese life insurers are set to benefit from rising bond yields set to be reinforced by the Bank of Japan’s (BOJ) recent relaxation of its yield curve-control policy, Fitch Ratings has said.

The BOJ’s move to raise the permitted ceiling for 10-year Japanese government bonds (JGBs) to 1% from 0.5% previously will allow the 10-year yield more scope to rise in the immediate future, and is broadly in line with Fitch’s expectation that 10-year JGB yields would rise to 1% by 2024.

“The adjustment reinforces our view that Japanese life insurers’ positive investment spread will generally rise over the next few years, helped by the moderate rise in Japanese-yen bond yields and steepening of the JGB yield curve,” Fitch stated.

“Life insurers benefit from these trends as the duration of their liabilities is longer than the duration of their assets. This supports our expectation that the sector’s overall profitability will recover in the year ending March 2024, following a decrease in core profit last year, which stemmed from a substantial rise in insured losses associated with COVID-19 cases. Profitability will also continue to benefit from the structural roll-off of historical policies with higher guaranteed rates of return. We further expect life insurers’ capital adequacy to remain sufficient for their ratings for some time, due largely to steadily accumulated core capital. The aggregate statutory solvency margin ratio remained high at 955% at end-March 2023.”

Exposure to JGBs among Japan’s nine traditional life insurers reached 37% of their total invested portfolio by end-March 2023, from 34% a year earlier, and we believe that a further rise is likely in the near term. This partly reflects higher currency-hedging costs, which have encouraged insurers to reduce their foreign bond exposures.

Furthermore, exposure to interest-rate risk, as measured by the duration gap between assets and liabilities, has reduced in recent months as life insurers have shifted their asset holdings further towards "super-long" JGBs, more in line with their very long-dated liabilities. The trend has been driven partly by a desire to limit interest-rate risk exposure ahead of the introduction of a new economic value-based regulatory regime from 2025.

Fitch said adjustments to Japan’s monetary policy could still carry risks for local life insurers however. "Notably, the yen could appreciate if market investors perceive further tightening of Japanese monetary policy as likely. That would erode coupon income from insurers’ foreign bond portfolios, which remains significant even though exposure to foreign holdings has recently fallen as JGB exposure has increased."

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