Japan's major insurance companies achieved higher revenue and profit in fiscal 2023. They did so through diversification of revenue sources and increased investment income, despite the effects of inflation and hedging costs.

In S&P Global Ratings' view, their capital has further stabilized. Better financial conditions, such as higher interest rates, and insurer efforts to reduce market risk have helped here. Our ratings on these insurers, however, are likely to remain rather stable. This is because our sovereign rating on Japan (A+/Stable/A-1) constrains the upside to our ratings on insurers.

Combined unconsolidated core insurance profits and consolidated net income of the four major life insurers increased about 32% and about 101%, respectively, in fiscal 2023. Combined consolidated net income of the three non-life insurance groups grew about 142% or 141% after adjusted for reserves that are sources of retained earnings.

Stability of capital at major life insurers has increased. These companies have worked to reduce interest rate risk exposure by reaping the benefits of rising interest rates and have increased the value of their in-force insurance policies. They may see this as an opportunity to boost growth investments and improve their long-term earnings capacity. Core insurance profits improved in fiscal 2023 because of a reduction in insurance payments related to COVID-19 and growth in interest and dividend income. However, costs of foreign currency hedging remained high, partially offsetting this improvement. Their capital levels are trending up as they reduce market risk exposure by improving asset-liability management and ceding in-force policy blocks through reinsurance. Meanwhile, not only publicly listed insurers but also mutual insurers are actively investing to grow in both the insurance and non-insurance sectors. We believe it has become increasingly important for the major life insurers to manage earnings and risk on a groupwide basis as they continue to diversify.

Profit at the three major non-life insurance groups is increasing. This is thanks to higher earnings from overseas insurance operations and sales of strategic shareholdings. However, there remains room for improvement in their domestic non-life business. Following the issuance of business improvement orders, the three major non-life groups have been working to reform their underwriting operations and business management. As part of the reform, they have announced their intention to accelerate the sale of strategic shareholdings. As a result, we expect profit to remain strong for the non-life majors. Domestically, the groups are focused on improving performance in their fire insurance and auto insurance businesses. They are likely to continue to invest for growth and to increase shareholder returns. This may somewhat constrain capital growth.

The four major life insurers are Nippon Life Insurance Co., The Dai-ichi Life Insurance Co. Ltd., Sumitomo Life Insurance Co., and Meiji Yasuda Insurance Co. The three major non-life insurance groups are: Tokio Marine Group, MS&AD Insurance Group, and Sompo Holdings Group.

Table 1

Table 2

Life Insurers: Pandemic Effects Fade

In fiscal 2024, we believe that higher domestic interest rates and diversified investment assets will underpin four major life insurers' core insurance profits, although performance will depend on economic conditions.

The four major life insurers' combined unconsolidated core insurance profits increased in fiscal 2023.   It rose about 32% to ¥1.8 trillion (see chart 1a). Combined mortality and morbidity gains were up about ¥382.6 billion. This was mainly due to lower insurance payments related to COVID-19. Such payments had increased sharply in fiscal 2022. Interest margins increased by a limited ¥27.3 billion in fiscal 2023. This was due to persistently high foreign exchange hedging costs, mainly driven by the gap between domestic and foreign interest rates, which partially offset the increase in interest and dividend income resulting from higher interest rates and dividends.

Average guaranteed rates on insurance liabilities are declining.  This is in tandem with a decrease in the proportion of insurance products sold with high guaranteed rates. In response to increasing domestic interest rates, the major life insurers have raised guaranteed rates on their single premium whole life insurance products to about 1%. As a result, the rates are likely to bottom out gradually. Aggregate investment return on core insurance profit has been declining; but will likely turn to growth slowly, as interest and dividend income has started to increase (see chart 1b).

Chart 1a

Chart 1b

In terms of insurance sales, we focus on competition for new policy acquisitions and revenue diversification.   The four major life insurers' aggregate annualized new premiums increased in fiscal 2023 due to sales growth in single premium products, as a result of rises in interest rates. Aggregate annualized in-force premiums also increased (see chart 2). Sales of single premium products in Japanese yen, in addition to sales of foreign currency-denominated savings-type products, are increasing.

The major life insurers' stand-alone mortality and morbidity gains have been decreasing over the longer term, reflecting a decline in in-force policies.   Thus, they are seeking to diversify revenue streams by diversifying distribution channels and products and by acquiring or investing in overseas life insurance companies. We consider managing earnings and risk on groupwide bases and strengthening corporate governance are becoming more important for the groups.

Chart 2

Investments in overseas credit and alternative assets are increasing.   Such investments require expertise and ability to manage risk. The major life insurance companies sold their foreign bonds with foreign exchange hedges between fiscal 2022 to the middle of fiscal 2023, because of increased costs of foreign currency hedging (see chart 3). Meanwhile, they have increased overseas credit investments and alternative investments to boost investment yields (see chart 8). Alternative assets include private equity, private debt, and infrastructure.

Major life insurance companies with subsidiaries in the U.S. have exposure to commercial real estate.   However, we estimate that such exposure represents 4% or less of their groupwide investment portfolios. We also believe that credit and alternative investments will not materially affect the creditworthiness of the life insurers, as they are likely to keep exposure to levels they consider tolerable. Nevertheless, we will monitor the quality of the assets and risk management.

Chart 3

We expect the major life insurers' foreign exchange hedge ratios to remain high.   The insurers tend to avoid foreign exchange risk (see chart 4). Meiji Yasuda Life aims to generate investment income by increasing its unhedged foreign bondholdings. However, the other major insurers continue to have high hedge ratios, reflecting their avoidance of foreign exchange risk. Currency swaps and options are increasingly used to reduce hedging costs.

Chart 4

Economic solvency ratios (ESRs) at the major life insurers are likely to improve or remain stable, in our view.  Domestic interest rates are rising moderately following the Bank of Japan's decision to end negative interest rates in March 2024. The major life insurers' interest rate risk exposure is declining as durations of their life insurance liabilities shorten. In addition, an increasing number of life insurers in Japan have begun to cede their in-force policy blocks through reinsurance to reduce interest rate risk and improve future profits (see chart 5).

A rise in stock prices heightened equity risk in fiscal 2023.  Among the life insurance majors, Dai-ichi Life is actively reducing its domestic equity exposure. However, unlike non-life insurers, life insurers have not announced plans to reduce strategic equity holdings. The major life insurers' domestic equity holdings are largely for investment purposes. Considering this, we expect their overall equity exposure to remain flat or decline slightly in the near term.

Major life insurers have continued to purchase or invest in overseas insurance businesses and to acquire non-life insurance businesses since 2023.  This has been driven by improved capital positions. In addition to these growth investments, we expect publicly listed insurers to increase shareholder returns. This will likely constrain capital growth to some extent.

Chart 5

Major Non-Life Insurance Groups: A ¥9 Trillion Share Sale Plan

In fiscal 2024, profit levels of the three major non-life insurance groups are likely to be supported by revenue diversification and gains on sales of strategic shareholdings. It could also depend on the impact of natural catastrophes.

Combined consolidated net income of the three major non-life insurance groups increased in fiscal 2023.  It grew 142% to ¥1.5 trillion (see chart 6a). This was due to reduced insurance payments related to COVID-19 and catastrophe losses, higher earnings from overseas insurance operations, and gains on the sale of strategic shareholdings. Profit contributions from overseas operations increased, generating ¥586.8 billion. Aggregate profits from domestic non-life operations also increased ¥400 billion. However, this was largely due to gains on the sale of strategic shareholdings and higher investment income.

Excluding Sompo Japan, major non-life insurance groups saw a decline in underwriting profit in domestic non-life insurance business.  Further, the three major non-life insurance groups recorded a net decline in catastrophe reserves. Additionally, MS&AD Group recorded a net decrease in its price fluctuation reserves. The three groups' combined net income after adjusting for reserves grew 141% to ¥1.4 trillion. Given significantly increased profit, the major groups announced their intention to increase dividend payouts and share buybacks (see chart 6b).

Chart 6a

Chart 6b

Sales of strategic shareholdings will likely have a limited impact on the operating performance but will improve the capital stability of the three major non-life insurance groups.  The major non-life insurance groups are in the process of reforming insurance underwriting operations and management, following business improvement orders issued in late 2023 and early 2024. Their reforms include measures such as the elimination of cross-shareholdings and changes to improve business processes. We do not expect reforms to have any significant impact on operating performance because the three groups maintain dominant positions in Japan's non-life insurance sector.

They intend to accelerate sales of strategic shareholdings as a part of their reforms.   Specifically, they plan to fully divest them in the next six to seven years. As of March 31, 2024, strategic shareholdings at three non-life insurance groups had a total market value of about ¥9 trillion. Their strategic holdings include sizable unrealized gains. Disposing of such positions does not contribute to the total adjusted capital under our capital model because it means converting unrealized gains into realized gains. However, it is likely to improve the insurers' capital stability by reducing equity risk. We are also monitoring uses of such realized gains. The three groups are likely to allocate the gains to growth investments and shareholder returns.

In Japan, auto insurance faces worsening loss ratios.  In fiscal 2023, auto insurance loss ratios rose due to higher traffic volumes and per-unit repair costs. As a result, the major non-life insurers' earned-incurred combined ratios, excluding compulsory auto liability insurance and household earthquake insurance, stood at 97%-103% in fiscal 2023. The major non-life insurers, excluding Sompo Japan, raised their auto insurance premium rates in January 2024. All three majors have announced that they may raise the rates again in 2025.

The profitability of fire insurance is likely to improve.  This is due to past premium rate increases, stricter underwriting policies, and another premium rate increase scheduled in October 2024. Business here had been unprofitable.

Non-life insurers are expanding new types of insurance products.  We expect to see increased competition based on reasonable pricing and risk advisory capabilities, as premium rate adjustments related to corporate co-insurance policies have been viewed as problematic by the regulator and clients.

Growth in reinsurance premium rates is moderating, which we view as a positive for primary insurance companies in Japan.  According to Gallagher Re, a division of Arthur J. Gallagher & Co., the increase in reinsurance premiums for the April 2024 renewals ranged from -5% to 1%, in contrast to double-digit growth since 2019. We believe this reflects improved reinsurer capacity and lower domestic natural catastrophe losses. However, we note that the three non-life insurance groups have increased their budget for natural catastrophes, which are intensifying in terms of frequency and severity (see charts 7a and 7b).

Chart 7a

Chart 7b

On the investment side, we consider risk management to be key as overseas credit investments and alternative investments increase and strategic shareholdings are reduced.  The major non-life groups are moving to integrate investment functions and develop expertise in overseas investments (see chart 8). For example, Tokio Marine has long been entrusting its overseas assets to its U.S. subsidiary Delphi Financial Group. In addition, MS&AD Group has established MSR Capital Partners LLC, an asset management firm with a focus on private debt investments. We anticipate that the three majors' credit risk exposure will increase. However, we do not expect the increase to be material, considering the groups' fairly robust risk management.

Chart 8

We expect the three non-life insurance groups to maintain solid capital levels.   The groups' ESRs are hovering within the target ranges they established in line with their internal models (see chart 9a). Reduction in equity risk should stabilize their capital levels further, despite increased risks associated with overseas insurance business and growing alternative investments. Sensitivity of ESRs to stock prices and interest rates is declining, thanks to the groups' risk reduction efforts (see chart 9b). Meanwhile, the three non-life insurance groups intend to increase dividend payments and share buybacks, which boost total shareholder returns. Their growth investments, including bolt-on mergers and acquisitions, and shareholder returns are likely to increase. This may constrain growth of ESRs somewhat.

Chart 9a

Chart 9b

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