The domestic underwriting profit of Nippon Life Insurance Company, one of Japan's biggest life insurers, began to recover from mid-2023, after the government eased COVID-19 pandemic-related restrictions, says Fitch Ratings. This will help profitability return to pre-pandemic levels from the financial year to March 2025 (FYE25).
The core profit margin reached 13% by FYE24, up from 11% a year earlier, when pandemic-related 'deemed hospitalisation' claims affected the insurer. In addition, pre-tax return on assets rebounded to 0.9%, from 0.4% a year earlier. This is stronger than Fitch's criteria guideline for the 'A' IFS Rating category.
Rating outlook revised to ‘Positive’
Fitch has revised the outlook on Nippon Life to ‘Positive’, from ‘Stable’, and has affirmed the company’s Insurer Financial Strength (IFS) Rating at 'A+' (Strong) and Long-Term Issuer Default Rating (IDR) at 'A'. Fitch has also affirmed the rating on the insurer's US-dollar subordinated debt at 'A-'.
The ‘Positive’ outlook reflects Nippon Life's solid capital adequacy, sustainable high core profit margin and steady earnings growth, driven by its international acquisitions.
Aside from underwriting profitability, other driver of Nippon Life’s ratings include:
'Very Strong' Capitalisation: Fitch believes Nippon Life will maintain 'Very Strong' capitalisation, as measured by the Fitch Prism Global Model, supported by the insurer's accumulation of retained earnings and issuance of hybrid debt. The consolidated economic solvency ratio (ESR) stood at 224% at the end of FYE24, remaining at a high level for the industry. However, this was down from 244% a year earlier, partly due to the negative impact of a volatile macroeconomic environment.
Fitch estimates that Nippon Life's capital adequacy is among the highest of major Japanese life insurers. The agency expects the company to further strengthen its capitalisation, partly because it is a mutual company and thus does not face pressure for share buybacks or dividend increases from equity investors.
'Most Favourable' Company Profile: Nippon Life's company profile is based on a 'Most Favourable' business profile and 'Neutral' corporate governance compared with other Japanese insurers. Nippon Life is Japan's largest insurer, supported by an extensive countrywide tied-agent network. This ranking results in Fitch scoring Nippon Life's company profile at 'aa+' under its credit-factor scoring guidelines.
Ongoing Global Expansion: Fitch believes Nippon Life's 2024 acquisition of a 20% equity interest in US-based Corebridge Financial will moderately strengthen the company's credit profile. The agency estimates that around 15% of Nippon Life's consolidated core profit will come from outside Japan after the deal. Nippon Life has allocated a budget of JPY2tn ($13bn) for M&A over the mid-term management plan period from FYE25 to FYE27, which would contribute to effective global diversification if suitable targets emerge.
High Exposure to Domestic Equities: Nippon Life's heavy exposure to domestic equities makes its capital position vulnerable to a downturn in the Japanese stock market. Its risky assets ratio was 141% at FYE24, higher than most peers, as it maintains a large exposure to domestic equities. Nippon Life has smaller exposure to US commercial real estate than its Japanese peers, partly because it does not have a sizeable US subsidiary. Fitch believes the related risks are small relative to the company's annual earnings and capital buffer.
Easing Interest-Rate Risk: Nippon Life faces interest-rate risk due to the duration mismatch in its assets and liabilities, but this risk is steadily decreasing. Its sensitivity to changes in interest rates declined substantially compared with the previous year. Fitch expects the company to increasingly narrow the assets and liabilities duration gap, supported by a moderately rising Japanese yen bond yield.