Key Takeaways
- We expect Japan's insurance sector to remain stable in 2024, supported by diversified earnings and stronger economic value-based capital as the fiscal 2025 introduction of new solvency rules nears.
- Earnings capacity and governance are key for Japanese non-life insurers in the wake of recent scandals; for life insurers, we focus on efforts to expand overseas and noninsurance business.
- Strengthening risk management remains important to address risk factors such as monetary policy changes, slower economic growth, inflation, and intensifying natural catastrophes.
The creditworthiness of Japan's insurers we rate will likely remain stable in 2024.
Better-diversified earnings, higher investment income, and strong capital bases owing to reduced market risk exposure are likely to underpin their creditworthiness.
For the strongest insurers, however, upside is limited. This is because our sovereign rating on Japan (A+/Stable/A-1) continues to constrain our ratings on insurers.
We expect life insurers' core insurance profits to improve moderately, despite the continued heavy burden of foreign currency hedging costs. We also expect their economic value-based capital to remain stable due to reduced interest rate risk exposure and the burden of policy reserves amid a rise in domestic interest rates. Under our base case scenario, we assume the Bank of Japan (BOJ) will end its negative interest rate policy in 2024 (see table 1) and that U.S. interest rates will decline in the second half of 2024.
Table 1
| Macroeconomic outlook | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Real GDP (% year-over-year) | CPI* | Policy rate§ | ||||||||||||||
| (Base case scenario) | (%) | (%) | ||||||||||||||
| 2023e | 2024f | 2025f | 2026f | 2023e | 2023e | 2024f | ||||||||||
| Japan | 1.7 | 0.9 | 1.0 | 0.9 | 3.3 | (0.1) | 0.0 | |||||||||
| U.S. | 2.4 | 1.5 | 1.4 | 1.8 | 4.1 | 5.5 | 4.7 | |||||||||
| Australia | 1.8 | 1.4 | 2.3 | 2.4 | 5.8 | 4.4 | 4.1 | |||||||||
| Eurozone | 0.6 | 0.8 | 1.5 | 1.4 | 5.5 | 4.5 | 3.8 | |||||||||
| e--Estimate. f--Forecast. *Annual average. §End of year. Source: S&P Global Ratings. | ||||||||||||||||
Life insurers will need to tweak investment strategies as they face changes in the financial environment. Interest rate movements in Japan and abroad will affect hedging costs, exchange rates, equity prices, and the economy. These insurers are actively seeking to expand noninsurance businesses as well as overseas businesses. However, earnings contributions from businesses outside of life insurance in Japan will likely be limited for now. We are monitoring temporary capital pressures that could emerge from such acquisitions.
Thanks to diversification of earnings, overseas operations are likely to drive the growth of major non-life insurance groups in Japan. In the domestic non-life insurance business, we are closely monitoring the extent to which the groups' measures to improve the profitability of automobile and fire insurance products can offset the effects of inflation and natural catastrophes. We also consider it important for major non-life insurance groups to improve governance in the wake of scandals in 2023 over insurance underwriting and claims.
Non-life insurance groups are working to reduce their exposure to equity risk. The groups' insurance underwriting risk and credit risk are likely to increase because of business expansion. Business investments and shareholder returns are also likely to rise. However, we expect their economic solvency ratios (ESRs) to remain stable.
Japan launches a new economic value-based solvency regime in fiscal 2025; its outlines will likely be finalized in 2024. Numerous field tests have been conducted, and we do not expect any surprises as finalization approaches. In addition, we published a new capital model on Nov. 15, 2023 (see "Insurer Risk-Based Capital Adequacy--Methodology And Assumptions") that will eventually be applied to all insurers we rate. We believe this will have little impact on our ratings on Japanese insurers.
Japan's four major life insurers are: Nippon Life Insurance Group, Dai-ichi Life Insurance Group, Meiji Yasuda Life Insurance Group, and Sumitomo Life Insurance Group. The three major non-life insurance groups are: Tokio Marine Group, MS&AD Insurance Group, and Sompo Holdings Group.
Life Insurance Sector
Creditworthiness: Likely to remain stable
Life insurance sector profitability is likely to stabilize in 2024. Profit had declined because of hospitalization benefit payments related to COVID-19. However, it has recovered and is likely to keep trending upward. In addition, risk appetite may increase as long-term Japanese yen interest rates rise. Our base case assumes only a moderate change in overall investment risk, though.
On an economic value basis, increased value of in-force policies will offset the unrealized losses. A rise in Japanese yen interest rates will increase unrealized losses on securities. However, it is a positive factor for the value of in-force policies. We believe that the embedded value (sum of the value of in-force policies and adjusted net assets) of life insurers will increase slightly, in line with new policy acquisitions and accumulation of retained earnings.
We expect Japanese life insurers to maintain their ESRs at an adequate level of about 200%. The insurers are likely to continue to control equity risk and interest rate risk to maintain and enhance their capital bases in anticipation of implementing new ESR-based regulations in 2025. Meanwhile, should they pursue aggressive investment strategies, this could pressure our assessments of capital and earnings, depending on the available capital buffers of each insurer. Overall, there was no significant change in ESRs at the end of the first half of fiscal 2023. However, investment risk has heightened for some companies (see chart 1).
Chart 1
Chart 2
Rising surrender-and-lapse ratios are highly unlikely to reach a level that would lead to liquidity concerns. The surrender-and-lapse ratio for individual insurance rose 0.7 percentage point to 5.6% in fiscal 2022, but is still low compared to the pre-2010 levels of over 8% (see chart 2).
The recent rise in the ratios reflects an increase in cancellations of foreign currency-denominated single premium products. Customers canceled these to lock in profits after large movements in foreign exchange rates. Going forward, a termination of government-led financial support related to COVID-19 may worsen employment conditions at small companies in Japan. This could lead to an increase in lapses and surrenders. However, this will have a minor impact on life insurers, in our view.
Profit: Improving, but signs of intensifying competition
We expect industrywide core insurance profits to return to growth in 2024, but only moderately. Combined insurance profits for the four major life insurance groups in Japan (the aggregate mortality and morbidity gains of the four major insurance companies on an unconsolidated basis) declined significantly in fiscal 2022. This was because of COVID-19-related insurance payments (chart 3). In the first quarter of fiscal 2023, such payments tapered off and the level of mortality and morbidity gains began recovering.
Foreign currency hedging costs remain high and continue to weigh on interest margins. Aggregate company guidance on core insurance profits for fiscal 2023 is likely to remain at 10% growth. We expect the core insurance profits to improve only moderately in fiscal 2024, as hedging costs are likely to remain high.
Chart 3
Chart 4
Life insurers are increasing guaranteed rates of Japanese yen policies and competition is likely to intensify. However, we expect the impact of higher guaranteed rates on in-force policies to remain moderate in 2024. Life insurers raised their guaranteed rates on Japanese yen-denominated single premium insurance products to about 1.0% in 2023, due to a rise in long-term Japanese yen interest rates. This exceeds the level of yields on 10-year Japanese government bonds. For education endowment insurance, we have seen guaranteed rates exceeding 1.0%.
Japan Post Insurance Co. Ltd. has entered the single premium whole life insurance market from 2024. As a result, competition in the domestic life insurance market is likely to intensify further. In addition, foreign currency-denominated insurance products may become less attractive than Japanese yen products as a result of monetary policy revisions by central banks globally, including at the BOJ. Savings-type products in foreign currencies have become very popular in recent years in Japan, but sales of such products are facing a turning point, in our view.
Overseas business and noninsurance business: Growing
Major life insurance groups will continue to expand their overseas businesses, in our view. We observed steady expansion of overseas business in 2023, including Nippon Life's additional investment in U.S.-based Resolution Life Group Holdings, Meiji Yasuda Life's bolt-on acquisition through its U.S. unit StanCorp Financial Group, and Sumitomo Life's additional investment in its affiliate Singapore Life Ltd. Such strong appetite for overseas expansion stems from Japan's aging population, which continues to pressure the earnings capacity of tied agent channels in the domestic market. Pressure has remained persistent after economic activities normalized post-pandemic.
Acquisitions in noninsurance businesses could pressure groupwide capital significantly, depending on size of investments. In our base case scenario, we expect contributions from noninsurance businesses to earnings of the major life insurance groups to remain limited. In noninsurance business, unlike in overseas business, the major life insurance groups tend to seek to improve their overall earnings capacity, including through synergies that boost domestic insurance business. Acquisitions in 2023 included Nippon Life's acquisition of Nichii Holdings Co. Ltd., which owns a nursing care provider (about ¥210 billion), and Dai-ichi Life's tender offer for Japanese welfare service provider Benefit One Inc. (about ¥290 billion).
Investment: Shift toward domestic bonds
We expect major life insurance groups to gradually shift their investments from foreign bonds to domestic bonds. The shift is likely to be only gradual in terms of overall asset mix. However, the scale of short-term fund flows could be large, depending on the movements of Japanese yen long-term interest rates. Foreign bonds accounted for 21.0% of the four major insurance groups' investment assets at the end of fiscal 2022, down about 5 percentage points from the previous fiscal year end. This is because they accelerated sales of hedged foreign bonds amid persistently high hedging costs. We anticipate that the sales will be ongoing. However, the proportion and outstanding balance of foreign bonds had increased as of Sept. 30, 2023, partly because of foreign-currency appreciation against the yen (see chart 5).
Chart 5
Chart 6
Major life insurance groups continue to be conservative about risk in 2024. Approaches to currency risk vary among insurers. This is in part because of the risk of Japanese yen appreciation amid U.S. interest rates turning to decline. Reflecting the accelerated sales of hedged foreign bonds, the hedge ratio on aggregate foreign currency-denominated assets for the four groups fell to 77% in September 2023, but remains high (see chart 6). In addition, the share of long-term hedging through currency swaps has been increasing since the end of fiscal 2022.
If Japanese yen interest rates rise very slowly, life insurers could seek higher investment returns. This could increase investment risk. The proportion of bonds with ratings of 'BBB' or lower (includes unrated bonds) in the four groups' aggregate bond portfolio is increasing (see chart 10). In order to secure investment returns, the four groups have been more actively investing in alternative assets such as private debt, even if such assets make up small proportions of their overall holdings. The four groups adequately control investments, including real estate and overseas credit investments, and we have not seen any material growth of risk exposure to a degree that threatens their creditworthiness.
Non-life Insurance Sector
Creditworthiness: Enhancement of profitability and governance is key
Major non-life insurance groups' sales are likely to increase, and consolidated net income should remain flat or slightly increase. Performance should be supported mainly by expansion of overseas insurance business and efforts to improve profitability.
We forecast net premiums written for the sector will increase. The effects of higher premium rates for automobile insurance and fire insurance will contribute here. We estimate that the sector's average combined ratio currently stands at 95%-99%. It is likely to remain within that range in fiscal 2024.
We expect the combined consolidated net income of the three major groups to increase in fiscal 2023. Major contributing factors include higher earnings from overseas insurance business, lower COVID-19-related insurance payments in Japan and elsewhere, and higher investment gains (see chart 7). On the other hand, a rise in automobile insurance loss ratio is a cause for concern in the domestic non-life insurance business. In terms of domestic natural catastrophes, incurred losses from catastrophes in Japan may remain at the same level as fiscal 2022, due to large losses from hailstorms and heavy rains in the first half of fiscal 2023 (chart 8). Overseas, incurred losses from the Maui wildfires in Hawaii were relatively large.
A large earthquake that struck Japan on Jan. 1, 2024, will have a limited impact on the groups' performances. This is because the Japanese government reinsurance scheme supports payments related to the household earthquake insurance written by private insurance companies. Accordingly, private insurance companies only owe net incurred losses from corporate earthquake insurance. Non-life insurance companies remain conservative about underwriting corporate earthquake insurance and also have reinsurance protection.
Chart 7
Chart 8
Major non-life insurance companies will continue to strive to improve their profitability and governance, in our view. Two scandals came to light in the sector in 2023. One involved cartel behavior related co-insurance policies for corporate clients; the other involved improper insurance claims by Bigmotor Co. Ltd., an auto repair company, to major non-life insurance companies. For the scandal related to cartel behavior, the Fair Trade Commission of Japan conducted on-site inspections of insurers on Dec. 19, 2023. The Financial Services Agency of Japan (FSA) issued business improvement orders to four major non-life insurance companies on Dec. 26, 2023. For the scandal related to Big Motor, investigations are ongoing, while measures are being taken to prevent recurrence. The FSA handed a business improvement order to Sompo Holdings Group on Jan. 25, 2024.
The scandals do not threaten the competitiveness of the major non-life insurers, in our view. The non-life insurance market in Japan is an oligopoly. Therefore, the issues will have limited impact on their operating performances. However, we will continue to closely monitor how insurers respond to the scandals, as well as actions from the regulator and the Fair Trade Commission, including the imposition of penalties.
We consider auto insurance loss ratios to be an important factor for the profitability of non-life businesses in Japan in 2024. Voluntary automobile insurance accounted for 46% of the sector's net premiums written (as of March 31, 2023). Loss ratios on such insurance can have a significant impact on earnings. Loss ratios on auto insurance deteriorated more than expected across the sector in fiscal 2023. This was due to post-pandemic revenge travel and inflation. Many non-life insurers raised their premium rates on auto insurance in January 2024. However, loss ratios may remain high, because higher premium rates take time to filter through. Furthermore, Sompo Japan Insurance Inc., a major non-life insurer, decided not to raise the rates in January 2024 in the wake of the Big Motor fraud. We are watching to see whether the premium rate hikes of January are sufficient to absorb the impact of inflation and higher car accident rates.
Non-life insurers will continue working to improve the profitability of fire insurance, in our view. Net incurred losses are rising because of intensifying natural catastrophes. Profitability has improved as a result of several premium rate increases, shorter policy terms on long-term insurance policies, and tighter controls on underwriting. However, we believe pressure will endure. Non-life insurers are likely to raise their fire insurance rates further in fiscal 2024, following the revision of reference rates (average increase of 13.0% nationwide; more detailed breakdown of water disaster premium rates) by General Insurance Rating Organization of Japan (GIROJ) in June 2023. Insurers still have a long way to improve the profitability of their fire insurance business through comprehensive measures, including disaster prevention and mitigation.
Offerings of new types of insurance products are increasing in Japan's non-life insurance sector. These are mainly casualty insurance that can be highly profitable. We expect earnings and revenue contributions from these product lines to continue.
We expect conditions in the reinsurance market for hedging natural catastrophe risk to remain tough. Reinsurance premiums in Japan have been increasing (chart 9). We believe they may rise again during upcoming renewals in April 2024, but at a slower pace.
Non-life insurance groups are controlling reinsurance premiums. They are doing so by reviewing reinsurance schemes and contractual coverage while maintaining risk volume for natural catastrophe. They are maintaining reinsurance coverage related to catastrophe layer reinsurance but reducing the coverage related to working layer reinsurance and increasing risk retention. Accordingly, their earnings are more sensitive to the impact of natural catastrophes and will remain so in 2024, in our view.
Chart 9
ESRs: Likely to remain stable through enhanced risk management
We expect major non-life insurance companies to continue to reduce their strategic shareholdings and strengthen their investment returns. They are accelerating sales of such shareholdings in order to quickly reduce their proportion relative to consolidated net assets. Meanwhile, the exposure of the major non-life insurance groups to foreign bonds and alternative investments is increasing, underpinning the growth of investment returns. The share of bonds with 'BBB' ratings or lower (includes unrated bonds) in their aggregate bond portfolio is increasing (see chart 10). In the near term, credit risk and real estate risk may materialize due to economic conditions overseas. Investment and risk management expertise is key, in our view.
Chart 10
We expect the ESRs of the major non-life insurance groups to remain within their target ranges in 2024. Comparisons are difficult because they use different confidence levels and measurement methods. However, the groups' ESRs remain relatively stable (see chart 11). Risk volume could increase in line with revenue, but they are likely to control ESRs mainly by reducing equity and interest rate risk. They have increased dividends and undertaken some share buybacks in response to earnings growth. We believe that their shareholder returns are likely to trend higher. In addition, their efforts to diversify earnings bases, including through bolt-on mergers and acquisitions, are likely to continue.
Chart 11
Hybrid Issuances
The need for subordinated bonds is declining
Japanese insurers' needs to issue subordinated bonds will likely diminish, in our opinion. Subordinated bond issuance in the non-life sector has been weakening for the past few years. This is because non-life insurers have kept their ESRs at levels deemed necessary. In the life insurance sector, on the other hand, such bond issuance has increased in preparation for new solvency regulations. However, issuance amounts have been declining since fiscal 2022 (see chart 12).
ESRs are rising, so we believe life insurers will issue subordinated bonds mainly to refinance existing subordinated bonds. As a result, new issuance is likely to decelerate. We expect new issuance for refinancing to be mainly in Japanese yen, where costs are low. That said, Fukoku Mutual Life Insurance Co. and Sumitomo Life have issued U.S. dollar-denominated subordinated bonds in 2023 to maintain relationships with overseas investors.
We still see the possibility of insurers issuing such bonds for acquisitions. This is because both life and non-life insurance majors have an appetite for business expansion, both in insurance and in noninsurance, through acquisitions if opportunities arise. Major insurers in Japan have leverage ratios of around 15%-20%. We do not expect their leverage ratios to rise to a concerning levels in the foreseeable future (see chart 13).
Chart 12
Chart 13
Related Criteria
Related Research
- Sompo Japan's Creditworthiness Can Weather Business Improvement Orders, Jan. 26, 2024
- Global Credit Outlook 2024: New Risks, New Playbook, Dec. 4, 2023
- Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way, Nov. 26, 2023
- EMEA Insurance Outlook 2024: Navigating the way home, Nov. 21, 2023
- Global Reinsurance Stabilizes As Green Shoots Emerge In Underwriting, Sept. 5, 2023
- Insurance Industry And Country Risk Assessment: Japan Property/Casualty, Aug. 30, 2023
- Insurance Industry And Country Risk Assessment: Japan Life, Aug. 30, 2023
- Japan Scandals Won't Erode Non-Life Insurer Oligopoly, Aug. 7, 2023
- Japan's Insurers Work To Reverse Their Slow Declines, June 29, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Toshiko Sekine, Tokyo + 81 3 4550 8720; toshiko.sekine@spglobal.com |
| Secondary Contact: | Toshihiro Matsuo, Tokyo + 81 3 4550 8225; toshihiro.matsuo@spglobal.com |
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