Like their global peers, Japanese life insurers use investment strategies based on ALM principles, which are essential to ensuring that their investment choices are well aligned with the long-term obligations of their insurance contract, according to a report on the outlook for Japanese life insurers.
The report, by CreditSights, a FitchSolutions company, says that Japanese insurers are inherently exposed to a moderate level of credit risk due to their substantial allocation to fixed-income investments; however, credit risk appears to be well managed, as evidenced by the excellent credit quality of their bond portfolios.
The market risks faced by Japanese life insurers are more pronounced than the credit risk, with equity risk standing out as a notable concern for insurers relative to their global peers; the proportion of equity holdings at 15-20% of overall investment is much higher than other APAC or US peers, but the insurers slowly plan to reduce this holding.
It is important for credit investors to understand how various market risks could affect the solvency levels of Japanese life insurers; in this regard, CreditSights thinks that Japanese life insurers are in a much stronger position today than they were before the COVID-19 period, with the ability to withstand severe investment stress tests and maintain their solvency.
During FY23, the Japanese economy underwent a remarkable period of transition, marked by the removal of Yield Curve Control (YCC), the sharp depreciation of the yen, and a significant rise in the domestic stock market.
Several trends have emerged in the investment strategies of Japanese life insurers, including a shift towards JGBs, a reduction in hedged foreign securities, a flexible approach to unhedged overseas investments, and a deliberate reduction in equity investments.
CreditSights views the evolving investment strategies as credit-positive for the insurers' solvency ratios, while we consider their impact on operating performance as neutral.
Reducing exposure to foreign securities and equities will result in a lower return; however, this potential downside is offset by the reduction in hedging costs and the strategic increase in allocations to longer duration or corporate bonds.