Growth varied in FY23, but Nippon Life dominated with a strong Increase
While new business premiums continued to grow for all insurers, total premiums, including new business and inforce business, slowed in FY23 (financial year ended 31 March 2024) for most insurers, with the exception of Nippon Life. Nippon Life's impressive growth in consolidated premiums, up 34.9% to JPY8,598.3bn ($54.7bn), stood out as the company was able to capitalise on the strength of its subsidiary (Nippon Wealth Life) to capture demand for foreign currency single premium products from affluent customers.
In contrast, Meiji Yasuda experienced a decline in sales, with premiums falling by 8.9% to JPY3,333.1bn, mainly due to a decline in single premium products. Sumitomo Life, with a modest 2.4% increase in premiums to JPY2,644.2bn, and Asahi Life, with a 3.2% increase to JPY432bn, were actually driven by domestic or overseas subsidiaries to offset the decline in premiums at the main operating units. Dai-ichi Life's financial story was one of recovery in FY23, as evidenced by strong growth in the final quarter compared with sluggish performance in the first half, reflecting the positive impact of new product launches in December 2023.
Strategic overseas expansion was in the spotlight for the insurers in FY23 and early FY24, with notable moves such as Nippon Life's acquisition of a 20% stake in Corebridge from AIG and Sumitomo Life's acquisition of SingLife from Aviva. These moves demonstrate a strategic commitment to growth in international markets, and underline insurers' strategy to diversify their revenue streams in response to domestic market saturation and demographic decline.
CreditSights expects such investments to continue over the medium to long term, with the substantial sizes of the Japanese life insurers enabling them to undertake significant transactions, particularly in the US market. CreditSights thinks the transition to a new solvency regime next year (FY25) may temporarily moderate these expansion efforts, but once this regulatory change is fully integrated, a more active period of acquisitions may follow.
Profit rebound with lower COVID-19 claims and rising interest rates
The industry as a whole benefited from the fading impact of the COVID-19 pandemic, with all insurers reporting substantial recoveries in core profits. These recoveries were significant, for example, with Nippon Life's core profit increasing by 61.5% to JPY764bn, Meiji Yasuda's core profit increasing by 39.6% to JPY561.0bn, and Fukoku Life's core profit doubling to JPY99.5bn. As a result, core profit margins improved across the industry.
Japanese life insurers also benefited from improved investment results on the back of increased interest rates and a depreciating yen. Companies such as Nippon Life benefited from this trend, with its investment spread rising 15.8% to JPY284.6bn.
Besides, the weakening yen boosted returns on overseas income when translated back into domestic currency, as evidenced by Meiji Yasuda's and Sumitomo Life's increase in investment income. However, for Sumitomo Life, the increased reliance on foreign assets resulted in higher currency risk, leading to higher hedging costs. Overall, Japanese life insurers reported strong growth in net income after tax, supported by reduced COVID-19 claims and improved investment results, as mentioned above.
Nippon Life's net income after tax surged 190.1%, driven by also robust sales of foreign currency products and good investment returns amid rising interest rates. Meiji Yasuda managed to reverse a decline in premiums with a 78.6% increase in net income after tax, supported by lower pandemic-related claims and the yen depreciation to support its investments. Sumitomo Life's financial performance reflected a 36.8% increase in net income after tax, largely due to accounting gains from the acquisition of SingLife (this reflected the increase in fair value of prior investments in SingLife; excluding this effect, pre-tax earnings would have dropped by 62.7%). Dai-ichi Life posted a 23% increase in net income after tax, reflecting a recovery in insurance profits and strong product launches and higher investment income towards the end of the year.
Among the smaller life insurers, Fukoku Life reported a 20.6% increase in net income after tax despite a slight decline in premiums, benefiting from lower payouts for COVID-19-related claims and lower foreign exchange hedging costs (as the insurer completely withdrew from investing in hedged foreign securities). The exception among insurers, Asahi Life, reported a 49.5% decline in net income after tax, mainly due to higher future benefit provisions.
Financial positions remained strong, backed by high solvency ratios
Despite some fluctuations, insurers across the board reported solvency ratios far above the regulatory minimum, reflecting a well-capitalised sector. In our view, preliminary figures for the economic solvency ratio (ESR) also suggest that many insurers are well-positioned to transition smoothly to the new framework next year. In FY23, the solvency ratios of Japanese life insurers reflected a mixed trend, with some companies experiencing declines due to increased investment risk, while others saw improvements supported by unrealised gains on securities.
Outlook: Measured growth and stable core profit
Looking ahead to FY24, insurers' outlooks show a spectrum of expectations shaped by the previous year's experience and the strategies they have implemented.
Nippon Life predicted a slowdown in sales, especially in the single-premium product market, which had previously surged.
Meiji Yasuda, boosted by the expected contribution of Elevance Health and StanCorp's earnings, expects a rise in premiums. However, the insurer is also preparing for possible challenges in sustaining core profit growth amid rising operating expenses and the unpredictable impact of currency fluctuations.
Sumitomo Life is also forecasting an increase in premiums (+15%) following the integration of SingLife, a strong boost that underscores the value of strategic acquisitions. However, core profit is expected to remain flat as the insurer anticipates higher costs related to personnel, innovation and hedging.
Dai-ichi Life is projecting a modest increase in profitability, with a flat core profit and an increase in investment income due to lower hedging costs. The company also expects new business value to increase, driven by stronger sales and improved underwriting.
Lastly, Asahi Life's outlook leans towards stability, with a modest increase in core profit forecast, particularly as the company aims to strengthen the performance of its bancassurance-focused subsidiary Nanairo Life.
CreditSights’ view of Japanese life insurers over the next 12 months is optimistic, albeit mindful of some potential challenges. While the dramatic growth in core profits seen in FY23 is unlikely to be repeated, insurers generally expect stable or slightly improved core profits. However, it is worth monitoring the rapid growth in overseas markets following recent acquisitions, as these ventures may entail higher acquisition and integration costs, which will impact overall operating expenses. Investment risk remains an important variable, with potential US interest rate cuts in the second half of the year or yen appreciation potentially reducing interest income.
Nonetheless, this may be mitigated by lower hedging costs or additional rate increases in Japan. Most importantly, with strong solvency ratios and a long-term investment approach in safe assets, the high credit quality of insurers' assets is reassuring.