This report does not constitute a rating action.
Japanese life insurers’ creditworthiness can tolerate a rise in latent losses on bonds driven by higher interest rates. The losses will be offset by a decrease in insurance liabilities, on an economic value basis, also driven by the rise in Japanese interest rates.
What's Happening
The market value of domestic bonds in Japanese life insurers' portfolios is declining. This has led to increasing latent losses on part of their bond portfolios, mainly policy-reserve-matching bonds. Rising domestic interest rates are behind the decline. Aggregate latent losses for the four major life insurers on an unconsolidated basis were about ¥8.2 trillion as of March 31, 2025. Japanese life insurers hold massive amounts of long-term bonds, including Japanese government bonds. They do so to ensure asset-liability management (ALM).
Why It Matters
Market price changes in insurance liabilities are not reported under Japanese accounting standards, and so unrealized losses on bonds matching insurance liabilities are gaining increasing market attention. Insurance liabilities are evaluated using a lock-in method: Liabilities are fixed using discount and frequency rates as of their contract dates. The market values of the assets, however, are disclosed. Our analysis, meanwhile, is on an economic value basis. It therefore incorporates latent losses on bonds driven by higher interest rates and fluctuations in matching insurance liabilities.
Japanese life insurers will continue matching the duration of their assets and liabilities for ALM purposes . Generally, the duration of yen-denominated liabilities is slightly longer than yen-denominated assets. However, we estimate that the average duration gap between assets and liabilities has declined from about five years to two years. This is because of moderate increases in interest rates since 2022, and insurers' efforts to extend the tenors of the yen-denominated bonds they hold. As a result, higher interest rates will likely lead to a near-balanced decline in the market values of assets and liabilities. Accordingly, we believe the impact of the higher interest rates will have an effectively neutral impact on our evaluation of capital on an economic value basis.
What Comes Next
Further rises in domestic interest rates will heighten impairment risk for bonds. Policy-reserve-matching bonds are reported on an amortized cost basis. Accordingly, changes in market values do not reach profit and loss statements or balance sheets. Nor do influence solvency margin ratios under current regulations. However, market values falling below 50% of book values could, in principle, trigger impairment losses. However, this scenario is remote for now.
Japanese life insurers may replace bonds with latent losses. This would allow them to evade impairment losses and improve investment yields. Insurers would likely report sales losses if they replace bonds in their portfolios. However, the possible impact of such losses on periodic profit/loss would be absorbed by realizing latent profit on available-for-sale securities, including stocks and foreign securities, and drawdowns of price fluctuation reserves. The four life insurance majors have about ¥18.8 trillion of unrealized gains in aggregate for available-for-sale securities on an unconsolidated basis.
Higher interest rates will likely heighten the importance of lapse risk . Rises in interest rates heighten the possibility that holders of savings-type products with low rates of interest could choose to lapse their policies. New solvency regulations come into force at the end of March 2026. Economic solvency ratios (ESR) under the new regulations incorporate the risk of mass lapse. As such, ESRs may decline under new regulations, which could lead to changes in life insurer strategies. However, we do not expect higher interest rates to rapidly increase lapse rates. Protection-type, rather than savings-type, products dominate the Japanese market. In addition, there are products with market value adjustment functions. We also believe life insurers have ample liquidity.
Capital of an insurer with over-hedging is likely to come under pressure from higher interest rates on an economic value basis . Over-hedging involves decreases in assets larger than decreases in economic value-based insurance liabilities because of higher interest rates. Currently, Sony Life Insurance Co. Ltd. (A+/Stable/--) is over-hedging. We will continue to focus on the duration matching strategies of life insurers.
Related Research
- Japan Insurers In 2025: Things Are Looking Up, Jan. 30, 2025
| Primary Contacts: | Koshiro Emura, Tokyo 81-3-4572-6185; koshiro.emura@spglobal.com |
| Toshiko Sekine, Tokyo 81-3-4572-6285; toshiko.sekine@spglobal.com | |
| Toshihiro Matsuo, Tokyo 81-3-4572-6174; toshihiro.matsuo@spglobal.com | |
| Kentaro Mukoyama, Tokyo 81-3-4572-6300; kentaro.mukoyama@spglobal.com |
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