The life and non-life insurance sectors in Japan in 2025 are expected to show strengthened capitalisation and healthy underwriting margins, says Fitch Ratings.
The global credit rating agency has a ‘Neutral’ outlook on both sectors, reflecting this expectation.
The aggregate statutory solvency margin ratio of traditional life insurers remained robust at 932% at end-September 2024, compared with 915% a year earlier, despite increased investment risks from volatile financial markets.
New regulatory regime effective from FYE26
The Japanese regulator will introduce an economic value-based new solvency regulation (J-ICS) from end-March 2026 (FYE26). Fitch believes that most insurers are well prepared, having secured sufficient capital buffers through the accumulation of retained earnings and continuous issuance of hybrid capital, and have reduced interest-rate risk substantially. Therefore, Fitch expects them to announce strong economic solvency ratios after FYE26.
Further easing of exposure to financial market risks
Fitch expects exposure to financial market risks will continue to decrease, which is marginally credit positive. Lifers' interest-rate risks have been falling steadily as they reduce ALM duration mismatch by accumulating ‘super long’ Japanese government bonds to cope with the new regulatory regime. Gradually rising yen bond yields will continue to benefit life insurers' investments and ALM.
Non-life insurers have decided to completely divest their strategic holdings of Japanese equities within the next five years, in response to a request from the regulator. The proceeds will be used for M&A activity, dividend increases, and/or share buybacks.
Profitability will remain sound for domestic life and international non-life
Fitch expects that the traditional Japanese life insurers will maintain strong profitability. These insurers' total core profit rose to JPY1,178bn ($7.74bn) (+22% yoy) in the first half of the financial year ending March 2025 (1HFYE25), despite the negative impact of higher currency-hedging costs.
Japanese non-life groups' business profit rose to JPY1,315bn (+353% yoy) in 1HFYE25, boosted by sales proceeds from strategic holdings and solid underwriting profit from US specialty insurance. The higher frequency of secondary perils should continue to restrain the profitability of domestic non-life, despite efforts to increase premium rates.
Active M&A activity and hybrid issuance
Fitch expects major insurers such as Nippon Life Insurance Company, The Dai-ichi Life Insurance Company, and Tokio Marine & Nichido Fire Insurance Co to continue to acquire foreign insurers and/or Japanese non-insurance companies for growth.
This would be due partly to the anticipated peak in profitable protection life products within five to 10 years, driven by Japan's declining population. Fitch believes Japanese lifers will issue hybrid capital to maintain solvency after significant M&A deals.