Fitch: Japan Life Insurers to Continue Increasing Foreign Bond Investment

Fitch Ratings says in a new report that it expects Japanese life insurers to continue to raise the allocations to high-grade foreign bonds in their investment portfolio because bond yields in Japan remain very low. 

Fitch expects Japanese life insurers' positive investment spreads to widen as their investment income is likely to increase due to bigger allocation to higher-yielding foreign bonds, unless the Japanese yen substantially appreciates against key foreign currencies, especially the US dollar. The insurers' shift to add more foreign bonds, however, would increase their exposure to foreign currency risk.

The agency also expects Japanese life insurers' insurance underwriting profits to remain flat over the next few years. This is mainly because moderate growth in their more profitable third (health) sectors will be offset by continued contraction in death protection products, such as term life. Thus, their overseas operations will become more important drivers of growth for Japanese life insurers. 

The capital adequacy of Japanese life insurers is likely to improve further, if current favourable conditions in the financial markets are maintained for some time. The improved capital adequacy in the financial year ended 31 March 2015 (FYE15) was mainly due to the increased unrealised gains on securities that were driven by a weaker Japanese yen and strong equity market, and to smaller extent, accumulated core capital, including retained earnings.

The report is available at www.fitchratings.com or by clicking the link in this media release.