The four major Japanese life insurers reported a 5.8% decline in their combined core profits over the fiscal year 2019, according to analysts at Moody’s.
The rating agency attributed the decrease to a revision in mortality table, and warned that capital and profitability remain at risk in the current environment.
The four insurers are Dai-ichi Life Insurance Company, Limited, Meiji Yasuda Life Insurance Company, Nippon Life Insurance Company, and Sumitomo Life Insurance Company.
“The drop in core profits, driven by group insurance policies and reflecting the recent revision in mortality tables, will be offset by reduced dividends to group insurance policyholders and thus have a limited impact on the insurers’ earnings accumulation,” said Soichiro Makimoto, a Moody’s Vice President and Senior Analyst.
“But as their newly acquired individual insurance policies gradually reflect the revision, their mortality margins and in turn profits will face pressure in the coming years.”
The four insurers’ annualized net premiums (ANP) from new policies declined 23.6% in fiscal 2019, mainly because of lower sales of products related to tax-savings and foreign currency-denominated savings products.
But both of these products are not key profit drivers for these companies, and hence Moody’s believes the impact on the insurers’ profits has been small.
On the other hand, their ANP from in-force policies remained flat, showing that their premium base is supported by long duration in-force policies, although their overall new ANPs in fiscal 2020 will likely decline driven by social distancing practices that make it difficult for face-to-face captive agent sales.
Moody’s further noted that insurers’ allocation to overseas assets has increased, reflecting continued interest in higher yielding assets.
Given lower hedging costs and wider credit spreads, the firm expects insurers to invest more into high-quality credit investments in the US despite the US interest rate cut.
Looking ahead, analysts suggested that insurers’ investment yields could fall to reflect lower-for-longer domestic interest rates and lower dividend incomes from stocks due to coronavirus-related impact.
Investment profits are also vulnerable to impairment losses on insurers’ domestic and foreign equity investments if there is a significant drop in equity prices.
Additionally, volatility in capital markets could erode capitalisation, especially for insurers that have higher equity, interest-rate and foreign-currency exposures.