Japan’s life insurers face moderate credit risk

Thanks to their notable allocation to fixed-income investments.

Japanese life insurers face moderate credit risk due to their significant allocation to fixed-income investments, but they manage this risk well, as shown by the high credit quality of their bond portfolios, CreditSights said in a note.

Like their global counterparts, utilise ALM (Asset-Liability Management) principles to ensure their investments align with their long-term insurance contract obligations. 

Market risks, particularly equity risk, are more pronounced for Japanese life insurers compared to their global peers. 

Their equity holdings, at 15-20% of overall investments, are notably higher than those of other APAC or US insurers, though there are plans to gradually reduce this exposure.

Credit investors need to understand how market risks affect the solvency of Japanese life insurers. 

Currently, these insurers are in a stronger position than before the COVID-19 period, capable of withstanding severe investment stress tests and maintaining their solvency.

In the fiscal year ending 2023, the Japanese economy experienced significant changes, including the removal of Yield Curve Control (YCC), sharp yen depreciation, and a notable rise in the domestic stock market. 

Investment strategies of Japanese life insurers have evolved accordingly, with a shift towards Japanese Government Bonds (JGBs), reduced hedged foreign securities, a flexible approach to unhedged overseas investments, and a deliberate reduction in equity investments.

These strategic shifts are seen as credit-positive for insurers' solvency ratios, though their impact on operating performance is neutral. 

Whilst reducing exposure to foreign securities and equities may lower returns, this is balanced by reduced hedging costs and increased allocations to longer-duration or corporate bonds.