Fitch: Japanese Life Insurers Seek Overseas Growth Opportunities

Japanese life insurers are likely to strengthen their insurance business outside Japan in 2016 while accumulating foreign bond holdings to improve their investment yield, Fitch Ratings says in a new report.

The Rating Outlook for Japanese life insurers has been revised to Stable from Negative, to be consistent with the Outlook for the Japan sovereign (Long-Term Local-Currency Issuer Default Rating at A). This reflects the insurers' high concentration of Japanese government bonds (JGBs) in their investment portfolios. The Sector Outlook remains Stable due to the overall improvement in earnings and sufficient capitalisation.

Several Japanese major life insurers have started to acquire sizable life insurance companies (for around JPY1.4trn in total) in developed markets such as the United States and Australia, following the overseas expansion plans of The Dai-ichi Life Insurance Company, Limited (Insurance Financial Strength (IFS) Rating A/Stable). Fitch believes this trend will continue, given the ageing and contracting population in Japan, and will monitor any integration and governance risks from international M&A.

Japan's life insurers are likely to continue moderately accumulating foreign bonds to seek higher yield, if the very low bond yields in Japan (at around 1% for 20-year JGBs) persist. Fitch expects currency risks (especially versus US dollar) may increase further, if insurers raise unhedged portions. Although the increasing allocation to foreign bonds will provide broader diversification from the concentration on JGB, currency risks need to be managed effectively given the majority of the life insurance liabilities are still yen-denominated.

Fitch expects the life insurers to maintain their strong earnings level and solid capital adequacy in 2016. The nine major traditional life insurers' core profit was JPY1,194bn in the first half of the financial year ending March 2016, up from JPY1,117bn a year earlier. The nine insurers' average statutory solvency margin ratio was 923.5% at end-September 2015, compared with 897.7% a year earlier. The view is supported by an improving investment spread owing to accumulated foreign bond investments and the moderately expanding profitable "third sector" (health) insurance product businesses.

The report titled "2016 Outlook: Japanese Life Insurance" is available at www.fitchratings.com or by clicking on the link in this media release.