In its latest industry report card, S&P says Japan‘s three major non-life insurance groups’ consolidated net income is likely to remain favourable.
Their net income soared more than 100% from the previous year, while the country’s major life insurers core profit in 2021 increased about 11% from the previous year.
Their overseas insurance business will likely expand, and their domestic non-life insurance business will also further grow as long as losses related to natural disasters in Japan normalise, the ratings agency said.
“Still, the groups must properly manage the impact of natural disaster risk on profits and capital. Their underwriting profit remains greatly susceptible to the size and frequency of natural disasters in Japan. However, the groups’ diverse sources of earnings should underpin profit stability”.
S&P believes, however, downside risk for Japan’s major life and non-life insurers has increased in 2022. Having come through COVID-19 in 2021, economic and financial uncertainty is back, with inflation rates way above what central banks in the US and Europe expected.
“Life insurers are improving their economic solvency ratios (ESRs). They originally placed emphasis on enhancing capitalization through issuance of subordinated bonds and accumulation of retained earnings. Now they are focused on reducing interest rate risk, in our view. This has led to them issuing fewer subordinated bonds”, S&P said.
The ratings agency says that maintaining ESRs within the ranges they have set is a major challenge for the groups, and they will have to carefully balance retained earnings and shareholder returns.
“To do this, they have to make subtle changes when needed to balance retained earnings and shareholder returns. As shareholders demand higher capital efficiency, strong pressure for returns endures.”
While the groups are likely to continue to take measures to hedge against natural disasters overseas, they continue to be exposed to major risk in this area domestically, in S&Ps view.
Non-life insurers are likely to continue to curb growth of risk associated with natural catastrophes overseas, and some increase in overseas natural catastrophe risk through acquisitions is unavoidable.
S&P expects the non-life insurers to work to increase geographic and business diversity and to continue developing more sophisticated risk management systems to cope with overseas catastrophe risk.
