Moody's downgrades Japanese life insurers to negative

Moody's has changed its outlook for Japan's life insurance industry to negative from stable, due to added pressure COVID-19 has put on insurers' capitalisation and profitability, as well as growing uncertainties in the domestic and global capital markets.

“Japanese life insurers could see their otherwise strong capital position erode over the next 12-18 months amid increased capital market volatility,” said a Moody’s VP and senior analyst Soichiro Makimoto.

The insurers have meaningful exposure to domestic equities and unhedged foreign-currency positions, leaving them vulnerable to declines in the Japanese stock market and a sharp appreciation in the Japanese yen. The risk for capital erosion has risen despite Moody’s assessment that insurers currently maintain relatively strong economic capitalization despite the latest drop in domestic stock prices. Their large financial investments in the capital market is also subject to price fluctuations.

“Moreover, disruptions from the coronavirus outbreak will add further pressure on the industry’s investment yields by maintaining already ultralow domestic interest for longer, while sales activities will be disrupted through reduced in-person interaction,” said Mr Makimoto.

While insurers’ profitability will remain supported by large mortality and morbidity margins in their protection products, this could change if the steady growth of the death tolls quickens. The death toll in Japan is lower than in the US and Europe, which have become the epicentres of the outbreak. On 7 April, Japan declared a one-month state of emergency covering Tokyo and six prefectures in response to an increasing number of coronavirus infections in the major cities. However under the state of emergency, people are not legally required to stay home or businesses forced to close.

On the positive side, Japanese insurers’ premium base remains supported by their large number of existing policies with long durations, which will partially mitigate the impact of a sharp drop in new sales. Moody’s expects the G20 economies will experience an unprecedented shock to economic growth this year, with Japan’s real GDP to contract by 2.4% in 2020 before rebounding to 1.4% in 2021.

Moody’s could change the industry outlook back to stable if the disruptions from the outbreak and capital markets start to stabilse, and the insurers maintain their strong financial and business profiles.

Source: Asia Insurance Review