Japan's insurers face the same key risks in 2022 as they did before the pandemic. And their credit quality suggests they are doing a good job of keeping a lid on them.

Overall credit quality of Japan-based life and non-life insurers will remain generally stable in 2022, in S&P Global Ratings' view. Our sovereign rating on Japan continues to constrain our insurer ratings.

We anticipate natural catastrophe-related losses will remain the key volatility factor for major domestic non-life insurers' net profit. However, major non-life insurance groups will likely be strict about maintaining the balance between capital and risks. They will base how they do this on their respective risk appetites and risk tolerances, in our view.

We expect major life insurance groups to continue to improve their financial standing. However, profit bases are likely to remain under pressure as investment yields stay low in Japan and elsewhere. We think life insurers will continue to strengthen their capital bases while reducing interest rate risk as the introduction of economic value-based capital regulations edges ever closer.

We think the gap in the pace of subordinated debt issuance between non-life and life insurance groups will continue. The outstanding balance of subordinated debt issued by the life insurance groups will likely continue increasing; they still have appetite to issue such debt. On the other hand, non-life insurance groups will maintain high economic solvency ratios (ESRs) and therefore have less need to issue such debt. Subordinated debt issuance will have a limited impact on their credit quality for now but could eventually result in an improvement in their financial leverage ratios, mainly through enhanced capitalization, in our view.

S&P Global Ratings believes the omicron variant is a stark reminder that the COVID-19 pandemic is far from over. Uncertainty still surrounds its transmissibility, severity, and the effectiveness of existing vaccines against it. Early evidence points toward faster transmissibility, which has led many countries to reimpose social distancing measures and international travel restrictions. Over coming weeks, we expect additional evidence and testing will show the extent of the danger it poses to enable us to make a more informed assessment of the risks to credit. In our view, the emergence of the omicron variant shows once again that more coordinated and decisive efforts are needed to vaccinate the world's population to prevent the emergence of new, more dangerous variants.

Japan's three non-life insurance groups are Tokio Marine Group, MS&AD Insurance Group, and Sompo Holdings Group. The four major life insurers are: Nippon Life Insurance Co., The Dai-ichi Life Insurance Co. Ltd., Sumitomo Life Insurance Co., and Meiji Yasuda Life Insurance Co.

Non-Life Insurers: Improvements Are No Panacea

Natural catastrophe-related losses remain a risk, despite normalized earnings improving

We expect Japan's three major non-life insurance groups' total consolidated net income to increase substantially in fiscal 2021 (ending March 31, 2022). This is mainly because, aside from group-specific one-off factors, net incurred losses from natural catastrophes remain low.

Other factors driving income growth include the reversal effect of pandemic-related net losses seen in the previous year and rising investment income from foreign securities. There have been a number of large natural disasters overseas, particularly in the U.S. and Europe. However, the three major non-life insurance groups' aggregate net incurred losses (before tax) remained at about ¥100 billion in the first half of fiscal 2021. They had a combined annual budget for such losses of approximately ¥200 billion.

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On a longer-term horizon, we expect Japan non-life business to grow moderately at major non-life insurance groups. In contrast, their life insurance businesses in Japan and overseas should expand stably. This is likely to enhance profit stability and ultimately contribute to maintaining capital at current levels. However, profit and loss for domestic fire insurance is likely to remain susceptible to domestic natural catastrophes and large-scale accidents.

The groups' Japanese non-life businesses should perform solidly and continue to generate stable earnings. This is because voluntary automobile insurance and personal accident insurance have low volatility.

The General Insurance Rating Organization of Japan (GIROJ) announced a 3.9 percentage point reduction on average in reference rates for voluntary automobile insurance. This primarily reflects fewer traffic accidents thanks to proliferation of advanced safety technology. In response, major non-life insurance groups are likely to reduce voluntary automobile insurance premium rates to some extent in 2022.

We expect, however, the three non-life insurance groups' combined ratios to remain low. They will likely secure sufficient premiums even after the reduction. Moreover, substantial growth of new types of insurance products, led by liability insurance, has continued. These products are likely to continue acting as growth engines for the groups' non-life insurance businesses in Japan.

Automobile insurance and new types of insurance products have relatively low risk and will likely contribute to profit on an economic-value basis. New areas, such as cyber insurance, do have growth potential but are less important for now, in our view.

Profit from fire insurance will likely continue improving. Although major non-life insurance groups remain incapable of setting proper premium rates relative to risk, they have raised premium rates for fire insurance, mainly for policies covering corporate contracts, and have applied stricter underwriting standards for policies. Given the intensity of natural disasters in recent years, GIROJ in October 2019 announced an average 4.9 percentage point increase in reference rates for fire insurance (householders' comprehensive insurance). This followed an average 5.5 percentage point rise in June 2018. Furthermore, GIROJ in June 2021 announced a 10.9 percentage point increase in the rates, together with its plan to shorten the contract term to a maximum of five years from the current maximum of 10 years.

We predict non-life insurers will respond by raising fire insurance premium rates for home and content policies in 2022. They will also likely abolish 10-year insurance policies and, instead, make design alterations to develop products that require policy renewals within a maximum of five years. As a result of the revisions, major non-life insurers will be able to reflect most recent natural disaster trends on fire insurance premium rates in a timelier manner. However, this will not improve revenue or profit anytime soon, in our view.

On a medium- to long-term horizon, we assume net incurred losses from domestic natural catastrophes will continue to rise. Extreme weather events, probably caused by climate change, are occurring across the globe. As a result, more natural disasters may be inevitable.

Premium rates for reinsurance contracts will also likely continue to rise as a major tool for hedging domestic natural catastrophe risk exposures. We think the underwriting cycle in the global reinsurance market has turned upward, mainly because of the number of natural catastrophes globally in recent years. According to Willis Re, a reinsurance broker, premiums for Japan's property lines related to typhoon and flood damage increased by about 15%-25% when renewals occurred in April 2019, and rose by about 30%-50% during April 2020 renewals, respectively. Furthermore, premiums for such property lines rose by about 15%-20% during April 2021 renewals. In sum, the accumulated increase in reinsurance premium rates in the past three years reached about 70%-120%.

Meanwhile, the groups will likely continue to avert to some extent the impact of the substantial increase in ceded reinsurance premiums. The groups can do so by refining reinsurance schemes and contractual coverage for in-force reinsurance policies. The groups remain risk averse in terms of natural catastrophe-related insurance risk amounts. They continue to increase reinsurance cover related to catastrophe layer reinsurance, for which the effects of ceded reinsurance rate increases are limited. On the other hand, with respect to working cover and aggregate cover related to working layer reinsurance, for which ceded reinsurance rate increases are particularly large, the groups accept profit volatility to a degree, considering its net impact on profit relative to risk, in our view.

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We believe the groups' life insurance and overseas insurance businesses will continue to underpin their profits. In Japan, we foresee continued growth of in-force life insurance policies. This is thanks to the groups' high brand power and cross-selling of non-life insurance products through agent networks.

We also expect the financial performance of the groups' overseas insurance businesses to improve for the following reasons. First, premium rates are likely to rise because the market has become firm. And second, underwriting standards will remain tight with a focus on profits. However, as with domestic non-life insurance business, large natural disasters remain a risk, in our view.

Meanwhile, investment profits are likely to remain under downward pressure. Insurer equity holdings have decreased because of ongoing sales of strategic shareholdings under persistently low interest rates. Accordingly, the three non-life insurance groups will likely see continuous drops in dividend income in their equity portfolios. In addition, some groups will likely sell stocks at a somewhat slower pace from now. As a result, capital gains from stock sales may decline. We therefore expect the groups to increase their asset allocations to credit risk or alternative assets in a bid to mitigate downward pressure on their investment income.

The balance between capital and risk is likely to remain favorable

In our view, the balance between capital and risk should remain commensurate with our assessments of their creditworthiness. The groups control the balance within ESR ranges they set. Their ESRs have continued to improve after bottoming in fiscal 2019. This is mainly thanks to an upturn in the financial environment, increases in retained earnings for the groups, and efforts to reduce equity and interest rate risks. We expect such efforts to continue for now.

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We anticipate non-life insurance groups will continue looking abroad. This will likely entail acquisitions of, and investments in, overseas insurance businesses. In addition, we foresee strategic alliances with companies in other industries, as the groups attempt to diversify their business portfolios. They will do so while taking into account capital levels and returns relative to risk.

A major challenge for the groups is balancing retained earnings and shareholder returns. As shareholders demand higher capital efficiency, strong pressure for returns endures. Meanwhile, although their ESRs are high, each group might want to hold some buffer, considering their susceptibility to market volatility, in our view.

Major non-life insurers are likely to continue selling strategic shareholdings to reduce susceptibility to the market and associated risk. Here, we incorporate group plans on and records of share sales into our assessments of their capital and profitability in our base-case scenarios. Sales of strategic shareholdings will likely help the groups improve capital quality and reduce market risk to a degree. We also reflect this view in our credit analysis for the groups.

Major non-life insurers, in our view, decide their sales of such stocks based on their economic solvency ratios, susceptibility, risk volume, and returns. Under policies on risk appetite, each group is aiming to reduce domestic equity risk. However, we see divergence in the pace of sales of strategically held stocks. Tokio Marine Group plans to sell strategically held stocks worth about ¥100 billion annually. The Sompo Group aims to divest about ¥50 billion in such stocks per year. MS&AD Group intends to continue sales of strategic shareholding for now, although it has not indicated a target amount.

The major non-life insurers are also likely to continue to reduce the susceptibility of their economic solvency ratios to interest rates, in our view. The introduction of economic value-based capital makes regulation more likely. In addition, the groups have expressed willingness to voluntarily adopt International Financial Reporting Standards (IFRS) as global listed companies. These trends will further underpin their efforts to reduce the susceptibility of their economic solvency ratios to interest rates. Coping with the high susceptibility of their ESRs to interest rates has become an increasingly important management issue for the major non-life insurance groups, in our view.

The groups are accelerating efforts to reduce interest rate risk. Life insurance subsidiaries of the non-life insurance groups have purchased large amounts of super-long-term government bonds. They have done so by replacing assets on their balance sheets with such bonds and by financing purchases through repurchasing operations. Such measures have helped the groups considerably reduce the susceptibility of their ESRs to interest rates.

Meanwhile, we expect major non-life insurance groups to increase exposures to credit risk with higher returns on risk as interest rates stay low in Japan and overseas. They will do so to try and mitigate the impact of lower investment returns as a result of reductions in equity risk. The groups are focusing on strengthening their investment expertise through, for example, entrustment to overseas subsidiaries and joint ventures with external asset management companies.

With respect to foreign exchange risk, the groups in essence continue to hedge. The impact of foreign exchange gain or loss on net assets in their insurance business is largely neutral. However, a substantial portion of net assets at consolidated subsidiaries overseas and the goodwill posted at the time of acquisitions are exposed to foreign exchange risk. Therefore, if the insurers bring on board new overseas subsidiaries or equity-method affiliates, this could increase the volatility of net assets through currency translation adjustments. Insurance risk is likely to increase, albeit at a moderate pace, as domestic life and non-life insurance and overseas businesses expand.

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On a medium- to long-term horizon, natural catastrophe risk in Japan could increase profit and loss volatility for major non-life insurance groups. Eventually, this might erode their capital bases. Payments of net incurred losses have consistently exceeded company budgets in recent years. In addition, assumed risk increased due to underwriting fire insurance policies. As a result, the groups have gradually increased their budgets for domestic natural disasters, in our view. Major non-life insurance groups control earnings volatility from an enterprise risk management (ERM) perspective. This would be in consideration of costs related to reinsurance or the amount by which capital is reduced relative to reinsurance costs, return on risk, return on equity, and ESR.

We assume that based on ERM frameworks, and considering limited control of risk volume and limited increases in ceded reinsurance rates, the groups will continue to increase reinsurance cover for the catastrophe layer in preparation for tail events. However, reinsurance alone would have a limited effect on domestic natural catastrophe risk control. Accordingly, we believe it is crucial for the groups to pursue further geographic diversification of earnings sources through overseas expansion. By doing so, they could mitigate the effects of domestic natural catastrophes on profit and risk volumes over the medium to long term.

Major non-life insurance groups will likely remain risk tolerant with regard to overseas insurance business, in our view. The groups' overseas insurance businesses have expanded through organic growth and bolt-on mergers and acquisitions. This gels with the groups' business portfolio strategies. They are therefore likely to favor reallocating more resources to overseas businesses over the medium to long term.

Nevertheless, the insurers are likely to somewhat curb growth of risk associated with natural catastrophes overseas after considering diversification effects. We base this view on their efforts to increase geographic and business diversity and to continue developing more sophisticated risk management systems.

There continue to be many cases of bolt-on acquisitions for advanced technologies. Insurtech and digital transformation, equity-method investments, and corporate venture capital investments are some of the areas that the groups target. We think risk associated with these bolt-on acquisitions, which are real options in effect, is limited, given the size and nature of the investments.

Life Insurers: Better Balance Between Capital And Risk

High profit, persistent pressure

We expect Japan's four major life insurers' core insurance profit for fiscal 2021 to broadly level off or slightly increase from the previous year. Domestic life insurers' annualized in-force premiums have bottomed out as new business has recovered. In addition, interest rates in the U.S. and Australia are rising. These factors act as tailwinds for the performances of the groups' life insurance businesses.

Looking at core insurance profit, aside from factors specific to each insurer, loading gains are likely to decrease due to higher amortization of information technology investments for long-term growth. Insurance-related profit will likely drop because of a structural decrease in mortality gains associated with a decline in in-force policies. On the other hand, we expect to see a slight increase in interest margins overall. This is mainly because dividends on equity and investment trusts are increasing because of recoveries in corporate earnings in Japan and elsewhere while average guaranteed rates and investment yields are on a downward trend.

We anticipate major life insurance groups will maintain high levels of core insurance profit. However, we note that their core insurance profits could become more susceptible to markets because of increasing reliance on investment income for earnings. For example, foreign currency denominated investment income depends on foreign exchange rates. And dividend income depends on market conditions.

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Over the longer term, Japan's life insurers' profits from domestic life insurance businesses will likely remain under pressure. This is because needs for policies covering death are likely to continue declining because of factors such as a declining birth rate and a shrinking population.

Not all factors are negative. For example, needs for insurance products in fields such as medical and nursing care, disability, and annuity-related insurance products, including those related to inheritance or gifts, remain strong. Having said that, the groups' mortality gains and loading gains are likely to continue decreasing moderately going forward. This is primarily because relatively profitable policies covering death acquired in the past are likely to decline. Fierce competition will also push down life insurers' profitability.

Intense competition among major traditional life insurance groups will continue, in our view. This is because the groups have similar strategies. These focus on: maintaining customer bases; further developing the domestic market; and implementing multi-brand, multi-product and multichannel strategies that respond to changes in the external environment and meet increasingly diverse needs across age groups.

Some life insurance groups have switched from commission-based pay to fixed compensation for sales agents. By doing so, they aim to maintain and improve the quality of sales agents and reduce staff turnover. We are watching for how this shapes productivity (related costs and the ability to acquire new business) and impacts competitiveness.

We also expect competition to remain fierce between major traditional life insurers and other rivals. These competitors are: life insurance companies from groups operating mainly in the non-life sector; overseas rivals; and new entrants from other industries (Sony Life Insurance Co. Ltd., for example). Overseas rivals and life insurance companies from groups operating mainly in the non-life sector are expanding their shares in Japan. Backing their growth is consulting know-how, parent company brand power, diversified sales channels, and strong customer bases.

Some customers today are more likely to possess information literacy and be sensitive to pricing. As a result, the relative importance of agency channels has continued to grow. In a bid to avoid missing such customers, major traditional life insurers have established subsidiaries that offer cheaper products under different brands. Such strategies will likely intensify price competition and eventually exert further pressure on life insurers' profitability, in our view.

We believe new policy acquisitions and profitability of savings-type insurance products will remain susceptible to financial markets. Needs for savings-type insurance products are structurally strong in Japan. Domestic life insurers have responded to periodic changes in financial market conditions by combining conflicting factors. These include single premium and level-premium, yen-denominated and foreign currency-denominated, and fixed and variable.

As to yen-denominated insurance products, there is still some demand for those related to inheritance or gifts. However, yield is key for prospective buyers of savings-type products. Assuming current low interest rates persist, substantial growth in sales of such products is unlikely. Accordingly, domestic life insurers tend to have weak incentives to sell yen-denominated savings-type products. Economic analysis on profit/loss management provides further disincentive.

Sales of foreign currency-denominated single premium insurance policies, however, could accelerate in tandem with continued rises in interest rates overseas. This is because yields on foreign currency-denominated products are higher than those on yen-denominated products. However, yield curves in the U.S. and Australia have been unstable. The Federal Reserve has shifted to a tightening stance, mainly because of inflation worries amid economic uncertainty. These circumstances lead us to consider foreign currency-denominated savings-type insurance products a continuing risk for new policy acquisitions and overall profitability of savings-type insurance policies.

With respect to investment performance, a structural decline in investment yields for life insurers may be inevitable. Reinvestment yields for Japanese government and corporate bonds are very low; bonds with relatively high yields in their existing portfolios are being redeemed at maturity. In anticipation of ongoing low interest rates, major life insurers are likely to invest in super-long-term bonds to reduce domestic interest rate risk. At the same time, they will likely continue allocating more to foreign currency-denominated credit and alternative investments to control overall risk volume to temper the decline in yields. In addition, we expect pressure on interest gains to ease because the fall in average guaranteed rates of interest will likely continue.

Better prepared for tough times

With capital regulations on an economic-value basis becoming a global trend, discussions and movements regarding economic value-based capital regulations in Japan continue in earnest. The Financial Services Agency (FSA) designated Internationally Active Insurance Groups (IAIGs) in Japan in its Financial Monitoring Report, published on Oct. 30, 2020. Meanwhile, the annual conference of the International Association of Insurance Supervisors (IAIS) on Nov. 14, 2019, adopted Insurance Capital Standard (ICS) Version 2.0.

Accounting standards are also becoming more economic value-oriented. International Financial Reporting Standards(IFRS)17 and U.S. Generally Accepted Accounting Principles'(GAAP) ASU2018-12 (LDTI, Long Duration Targeted Improvement) are scheduled to come into effect in 2023.

As regulatory progress continues, the balance between capital and risk at Japan's four major life insurers is likely to continue improving. In June 2020, the FSA's Study Group on the Economic Value-based Solvency Framework published a report indicating a timeline for the introduction of new solvency regulations. According to the plan, the new regulations will take effect in 2025 and insurers operating in Japan will be required to calculate their capital strengths based on the new standards in fiscal 2025. The FSA also announced the results of its field tests conducted in 2020 in a report published in June 2021. In this context, not only listed insurance companies but some mutual life insurers have also moved to disclose their ESRs voluntarily.

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We expect major life insurance groups to continue to take measures to respond to the potential introduction of strict capital regulations. Specifically, they will likely continue to control risk volume while further strengthening capital bases. Subordinated debt issuance and provisions for statutory reserves can help strengthen capital bases.

The critical challenge for major life insurance groups, in our view, remains reducing the high sensitivity of ESRs to interest rate movements. According to the results of the FSA's field tests in 2020, ESR would decline about 30 percentage points as a result of a 50-basis point parallel downward shift in interest rates. These tests assumed life insurer ESRs of 187% as of March 2020 and the same ultimate forward rate as the one applied in our base-case scenario.

We think it remains difficult for life insurers to fully address the interest rate sensitivity mismatch between assets and liabilities. This is mainly due to the structural mismatch of the duration of assets and liabilities, which Japan's life insurers heretofore have had. This is in part because of persistently low interest rates in Japan. The life insurers need to buy a large amount of super-long-term (over 20 years) yen-denominated bonds to reduce interest rate risk. At the same time, they also need to earn investment gains for accounting purposes in order to secure financial sources for dividends and retained earnings. Consequently, buying a large amount of low-yield bonds, such as super-long yen bonds, under a low interest rate environment is not a realistic course of action.

We expect major life insurance groups to continue to address the structural mismatch of interest rate sensitivity between assets and liabilities under persistently low interest rates. They can do so by considering various trade-offs against their targets. Major life insurers have sought to balance interest rate risk and profits by shifting to Japanese government bonds with super-long-term maturities and expanding their holdings of hedged foreign currency denominated bonds. In addition, life insurers have combined several measures to reduce interest rate risk, including purchasing super-long-term bonds through repo operations, interest rate swaps, swaptions, and ceding long-term policies. These measures have, in our view, worked to a degree.

Hedged foreign bonds have lost their appeal for the groups. Investments in them have slowed. This is particularly the case for hedged U.S. Treasuries, which were major investment targets. The yields for such bonds on a yen basis after adjusting for hedging costs worsened. Some life insurance groups have therefore restrained investments in hedged foreign bonds with forward exchange contracts.

Hedged or not, investments in foreign bonds unrelated to foreign currency-denominated policy reserves could be detrimental to capital bases. A decline in market value of such reserves could occur if interest rates overseas rise. However, for unhedged foreign bonds, exchange rate movements could offset valuation losses. Meanwhile, we do not see any marked changes in the geographic diversification of foreign bond investments at the life insurance majors.

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In our view, major life insurance groups are likely to continue to shift toward lower credit risk and alternative assets with large diversification effects, and away from market risk. This is to address a trade-off: controlling risk and securing yields in a low interest rate environment. Investments in higher risk assets are rising, triggered by the sharp drop in government bond yields in developed European economies and the U.S. Life insurers continue to invest primarily in highly rated assets and to strictly limit investment concentration. Hence, we consider the groups still have limited credit risk. Having said that, the proportion of bonds in group portfolios that are rated in the 'BBB' category or below, or unrated, is rising.

We do not expect major life insurers to aggressively expand their holdings of Japanese stocks. This is mainly because, in our view, their profitability is low relative to market risk, which the insurers want to keep below a certain level. The outstanding balance of their domestic equities increased because the overall market rose. We do not believe life insurers would willingly increase domestic equities, considering their maintenance of economic solvency ratios and risk control, while pressure on investment yields remains strong. Some insurers have reduced risk through futures and other instruments.

We believe the groups will keep investments in foreign equities and other instruments and assets with relatively low liquidity at levels that maintain a healthy balance between capital and risk. However, such investments, including in infrastructure and alternative areas, are trending upward, even if they still account for a relatively small proportion of portfolios. On the other hand, the proportion and outstanding balance of foreign equities and other instruments in their general account assets is rising. This is mainly because their investment in foreign stocks and foreign bond funds is increasing, in our view. Increased investment in foreign securities and assets with lower liquidity has led to higher risk volume. However, thus far we do not see any meaningful increase in risk volume that could affect the creditworthiness of the groups. This is in part because of diversification effects. While yields on bonds with strong creditworthiness have been declining globally, we will watch for future moves into them.

Major life insurers are likely to continue to work to avoid foreign currency risk, in our view. Their main hedging instruments remain forward exchange contracts, but they are using others. For instance, some life insurers are proactively hedging bonds denominated in foreign currencies through currency swaps. We believe they are doing so to profit from credit spreads by hedging foreign exchange risk to maturity. Insurers have also been hedging through currency options more in recent years. We think the main purpose of option trading is to reduce volume of risk, such as tail risk.

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Insurer Leverage And Coverage Ratios To Remain Satisfactory

We expect Japan's life and non-life insurers to continue to use subordinated debt in the medium term. Life insurers are issuing subordinated debt to strengthen their capital bases in preparation for the introduction of new capital regulations. Non-life insurers do so to deal with deteriorations in their capital bases. These arise because of the impact of natural disasters, costs for acquisitions, and pressure to deliver shareholder returns.

In the first half of fiscal 2021, while life insurers continued to issue subordinated debt (including financing through subordinated loans), non-life insurers did not, other than for refinancing. Rather, some non-life insurers have refrained from refinancing because their ESRs remain high.

Major life and non-life insurance groups' combined leverage ratio remains substantially below 40%, the threshold at which we assess funding structures as moderately negative. The likelihood of the ratio exceeding the threshold is remote, in our view. At major life insurance groups, the outstanding balance of subordinated debt has increased as issuance continues. On the other hand, the outstanding balance of subordinated debt at non-life insurance groups has peaked because no new issuances took place. At both major life and non-life insurance groups, financial leverage ratios improved in fiscal 2020. This is mainly attributable to stronger capitalization underpinned by a rise in unrealized gains on their stockholdings.

We believe coverage ratios will not likely be a critical issue in our credit analysis for both major life and non-life insurance groups. In fiscal 2020, non-life insurers' combined coverage ratio significantly exceeded 4.0x, which we consider neutral in our funding assessment, while that of life insurers fell slightly below the threshold. At both major life and non-life insurance groups, interest payments are decreasing, benefiting from low interest rates. This could serve as a positive factor to improve their coverage ratios. In fiscal 2020, non-life insurers' EBITDA rose, partially helped by an absence of large catastrophe events in Japan. On the other hand, life insurers' EBITDA declined sharply. This is because firstly, large amounts of capital gains from marketable securities and foreign exchange gains are excluded from the calculation of EBITDA. Secondly, the calculation includes the impact of exchange rate movements on foreign currency-denominated policy reserves, which is subtracted from current profit as increases or decreases in policy reserves in the income statement. Aside from these special factors, we see no particular issues that could affect major life insurers' interest payment ability.

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Note

Net short positions in forward contracts may include hedges against minimum guarantees in special accounts, but we consider the impact to be minor. Under the low interest rate environment, life insurers continue to limit or suspend sales of yen-denominated savings-type insurance products either as a risk control measure or because of economic analysis on profit/loss management. Against this backdrop, major traditional life insurers have entered the market for foreign currency-denominated savings-type products one after another. These are the investments relative to foreign currency-denominated policy reserves, and therefore, would not lead to an increase in foreign exchange risk. However, the hedge ratios above do not incorporate the foreign currency-denominated policy reserves for calculation because the amount of such reserves are not disclosed. If such reserves are incorporated, we think the hedge ratios in fiscal 2017 and beyond would be higher than the ratios shown in this chart.

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