May 26, 2016 / 10:07 AM / a year ago

Fitch: Japanese Life Insurers Resilient Amid Low-Yield Environment

(The following statement was released by the rating agency) TOKYO/HONG KONG, May 26 (Fitch) Fitch Ratings says that Japanese life insurers have demonstrated their resilience under the current low-yield environment, backed by stable earnings from insurance underwriting, after announcing their FYE16 (financial year ended March 2016) results. But the phase of continuous earnings growth seems to be stalling, due to unfavourable developments in financial markets. Fitch believes the life insurers are maintaining their strong profitability due to the thick margin from profitable protection-type insurance products such as term life and 'third (health) sector', despite declining bond yields in Japanese yen fixed-income markets. Underwriting fundamentals remain stable, as surrender and lapse rates continue to improve, backed by beefed-up sales forces. The core profit of nine Fitch-rated insurers remained high at JPY2,240bn, from JPY2,410bn in FYE15, supported in part by a positive investment spread (JPY461bn, from JPY384bn in FYE15). This in turn owed to a continuously declining average guaranteed yield together with rising high-coupon income from accumulated foreign-bond investments. Yen-denominated bond yields have come down substantially since the Bank of Japan adopted negative interest rates in January 2016. Fitch sees this as an unfavourable development for life insurers, as most are still in the process of extending their bond portfolios' duration in order to reduce duration mismatch between assets and liabilities. Life insurers are strengthening their foreign fixed-income investments in order to cope with Japan's 'super low yield' environment. This includes foreign corporate bonds and loans to project-finance deals overseas, and with stricter hedging of currency risk. The life insurers have also started to stop or substantially reduce underwriting Japanese yen-based saving-type products from this year; these have been relatively "high risk and low return" for life insurers. They are focusing instead on the protection-type products which are not influenced by interest rates. The agency regards these actions as credit positive. The nine Fitch-rated insurers' statutory solvency margin ratio (SMR) remained high at 917%, from 957% at end-March 2015. Continuous accumulation of capital through earnings and consecutive hybrid securities issuance, have resulted in the resilient SMR. This is despite moderately contracting unrealised gains on securities due to a sluggish domestic stock market and the yen's appreciation. Japanese life insurers' economic capital and economic solvency ratios (ESR) have clearly worsened, due to declining yields on yen fixed income, but are still sufficient for their current ratings. For example, T&D Holdings, Inc.'s (IFS ratings of its primary life insurance subsidiaries A/Stable) disclosed ESR declined to 162% from 217% a year earlier, which is still high enough. The agency expects that some insurers may issue hybrid securities and/or further reduce their investment risks, in order to restore their ESR. The major life insurers have started to acquire US-based and/or Australian-based life insurers in order to diversify their business portfolios and seek further growth. For example, The Dai-ichi Life Insurance Company, Limited (IFS: A/Stable) has already integrated Australia-based TAL Group and US-based Protective Life Corporation (IFS of its primary life insurance subsidiaries: A/Stable), and as a result demonstrated its strong earnings growth in FYE16 (consolidated net income by JPY179bn from JPY142bn a year earlier). Meiji Yasuda Life Insurance Company (IFS: A/Stable) acquired StanCorp Financial Group, Inc. (IFS Ratings of its primary life insurance subsidiaries A/Stable), and Sumitomo Life Insurance Company (IFS: A/Stable) bought Symetra Financial Corp. (IFS Ratings of its primary life insurance subsidiaries A/Stable). Fitch expects that these companies would follow Dai-ichi Life's step from FYE17, if they manage to smoothly integrate their US subsidiaries. Contact: Teruki Morinaga Director +81 3 3288 2781 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3F 4-8 Kojimachi, Chiyoda-ku Tokyo 102-0083 Akane Nishizaki Associate Director +852 2263 9942 Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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