Insurance

S&P Global: Japan Insurance Trends

Norbert Gehrke

25 Jul 2025 — 9 min read

On July 22, 2025, S&P Global Ratings hosted a live webinar titled "Japan Insurance Sector Trend," providing an in-depth analysis of the current state and future outlook for Japan's life and non-life insurance industries. The presentation, led by Director Toshiko Sekine and Associate Director Koshiro Emura, and moderated by Managing Director Kiyoko Ohora, detailed how Japanese insurers are navigating a complex environment of rising domestic interest rates, geopolitical uncertainty, and evolving regulatory standards.

The core message of the webinar was one of cautious optimism, highlighting the sector's enhanced resilience. Japanese insurers are actively diversifying revenue sources, strengthening their asset-liability management (ALM), and reducing market risk by divesting strategic equity holdings. While the sector's creditworthiness is expected to remain stable, with most major insurers maintaining A+ ratings in line with Japan's sovereign rating, several key risks and strategic divergences are shaping the industry's future. These include managing unrealized losses on bond portfolios, navigating the implications of the new economic value-based solvency regime (J-ICS), and pursuing overseas growth through mergers and acquisitions.

The discussion was structured around four key themes: the main takeaways and macroeconomic outlook, detailed trends in the life and non-life sectors, the strategic differences between listed and mutual insurers, and a deep dive into the impact of rising interest rates in Japan.

Part 1: Key Takeaways and Macroeconomic Forecast

Toshiko Sekine initiated the presentation by outlining the key takeaways and the macroeconomic backdrop against which insurers are operating.

A. Key Messages and Rating Distribution

The rating distribution for Japanese insurers is heavily concentrated at the A+ level with a stable outlook, mirroring the Japan sovereign rating. S&P Global maintains a stable outlook for both the life and non-life insurance sectors. This stability is underpinned by several strategic actions:

Profit Underpinning: Insurers are expected to support profits through revenue diversification (especially from overseas operations), strengthened asset management capabilities, and realizing gains from the ongoing sale of strategic cross-shareholdings.
Enhanced Resilience: Capital bases have improved, and market risk has been reduced. Consequently, insurers are more resilient to fluctuations in stock prices and interest rates, a critical strength amid increasing geopolitical uncertainty.

B. Risk Factors

However, S&P identified several risk factors that could challenge this stability:

Macroeconomic and Market Volatility: Losses arising from deteriorating macroeconomic conditions or sudden market fluctuations remain a primary concern.
Shareholder Returns: Aggressive increases in shareholder returns could pressure capital adequacy.
Aggressive Investments: M&A or strategic investments that exceed expectations could introduce new risks.
Catastrophe Events: Large-scale natural catastrophe events are an ever-present risk, particularly for the non-life sector.
Sovereign Rating Constraint: The credit ratings of most domestic insurers are capped by Japan's sovereign rating.

C. Macroeconomic Forecast

S&P Global’s economic forecast provides critical context for insurers' investment strategies. Key projections include:

Japanese Policy Rate: A gradual increase is expected, rising from 0.25% at year-end 2024 to 0.75% in 2025, and reaching 1.50% by 2027.
GDP Growth: Japan's real GDP growth is forecast to be modest, hovering between 0.7% and 0.9% from 2025 to 2028.
Inflation (CPI): Inflation in Japan is projected to be 3.3% in 2025 before moderating to 2.0% by 2028, remaining above the Bank of Japan's target.
Exchange Rate: The Japanese Yen is expected to appreciate against the US dollar, moving from ¥157.8 at the end of 2024 to ¥130.0 by the end of 2028.

This forecast of rising domestic rates and a stronger yen will significantly impact insurers' investment income, hedging costs, and the valuation of their overseas assets.

Part 2: Insurance Sector Trends

Toshiko Sekine provided a detailed analysis of the trends within the life, non-life, and hybrid issuance markets.

A. Life Insurance Sector

The life insurance sector is experiencing a foundational shift in its profitability and investment posture.

Core Profits and Margins: Aggregate core insurance profits for the four major life insurers are recovering, driven primarily by expanding interest margins. This positive development is a direct result of improved investment yields in the rising rate environment, while the average guaranteed rate of interest on liabilities continues its long-term decline. However, this is partially offset by headwinds from declining mortality/morbidity margins (due to a lower amount of policies in-force) and shrinking expense margins, which are being squeezed by rising IT system investment needs and labor costs.
Premiums and Products: Sales are shifting away from single-premium foreign currency-denominated products towards yen-denominated alternatives as domestic yields become more attractive. While the total annualized premiums in-force have remained relatively stable, new annualized premiums saw a decline in fiscal 2024. The industry's lapse and surrender rate has risen slightly but remains at a low and manageable 5-6%.
Overseas Expansion and M&A: Major life insurers are increasingly looking abroad for growth. Fiscal 2024 saw significant announcements of overseas investments and acquisitions. Dai-ichi Life continues to lead in this area, with overseas profits contributing over 25% of its group core profit. Nippon Life is rapidly catching up following its acquisition of Resolution Life. While S&P expects the pace of new M&A announcements to slow in fiscal 2025 as insurers focus on integrating their recent acquisitions, the underlying appetite for overseas expansion remains strong to counteract the mature domestic market.
Investment Strategy and Risk Management: Life insurers are actively de-risking their portfolios. The asset and liability duration gap has narrowed significantly, improving their resilience to interest rate changes. Key trends in their general accounts include:
- Reduced Domestic Equities: A steady reduction in domestic stock holdings to lower market risk.
- Increased Alternative Investments: A gradual increase in allocations to alternatives like private equity, private debt, and hedge funds, which stood at around 5% of assets for the major firms.
- Recovering FX Hedge Ratio: As the cost of hedging has decreased, the FX hedge ratio on foreign bonds has recovered to the 70-80% range, demonstrating more proactive management of currency risk.
Capital Adequacy and ESR: The sector is well-prepared for the new economic value-based solvency regulations. The latest Financial Services Agency (FSA) field test showed an average Economic Solvency Ratio (ESR) of 219% at the end of fiscal 2023. Under S&P's own capital model, most life insurers maintain sufficient capital buffers. Capital levels are forecast to remain stable, as the capital consumed by growth investments and shareholder returns is expected to be balanced by retained earnings.

B. Non-Life Insurance Sector

The non-life sector has demonstrated strong profitability, driven by strategic actions and favorable overseas conditions.

Record Profits and Shareholder Returns: In fiscal 2024, the three major non-life insurance groups (Tokio Marine, MS&AD, Sompo) achieved record-high profits, primarily fueled by large gains on the sale of strategic equities and strong performance from their overseas businesses. This surge in profitability has translated directly into higher shareholder returns through increased dividends and share buybacks. For fiscal 2025, profits are projected to decrease from this record high due to lower expected gains from equity sales, but strong underlying earnings from diversified business lines will continue to provide support.
Domestic Underwriting Challenges: The domestic non-life industry continues to undergo major reforms after receiving multiple business improvement orders from regulators related to governance and compliance issues. On the underwriting front, a key challenge is the rising loss ratio in auto insurance, driven by inflationary pressures on repair and labor costs. In contrast, the profitability of fire insurance is improving, thanks to successive rate adjustments.
Catastrophe Risk Management: In fiscal 2024, payments for domestic natural disasters remained within their initial budgets. However, a clear trend of increasing losses from overseas natural catastrophes is evident, reflecting the groups' expanding global footprint. In response, insurers are strengthening their catastrophe risk controls and ensuring they have adequate reinsurance coverage.
Capital Adequacy (ESR): The non-life sector also maintains robust capital levels. The latest FSA field test showed an average ESR of 200%. S&P's capital model indicates sufficient capital above a 99.95% confidence interval. Capital is expected to remain stable, supported by the expansion of overseas businesses, investment diversification, and a balanced approach to shareholder returns.

C. Hybrid Issuances

Both life and non-life sectors continue to utilize the hybrid capital market. The balance of subordinated bonds and loans has been steadily increasing, particularly for life insurers who use these instruments for refinancing and to support growth investments and capital volatility management. Despite this increase in hybrid debt, financial leverage for the major insurers remains at a comfortable and stable level, at or below 20%.

Part 3: Listed vs. Mutual Insurers: A Strategic Divide

A key part of the presentation focused on the diverging strategies between listed and mutual insurance companies, which have become increasingly clear.

Listed Non-Life Groups (Tokio Marine, MS&AD, Sompo): These groups are heavily focused on addressing governance issues and implementing industry reforms. They have been aggressively selling down their strategic equity holdings, increasing shareholder returns, and actively using closed-book reinsurance transactions to manage risk. Their M&A appetite remains strong, as evidenced by MS&AD's recent investment in W.R. Berkley Corporation.
Listed Life Groups (Dai-ichi Life, T&D): Similar to their non-life counterparts, these groups are actively reducing their equity holdings. They are also focused on increasing shareholder returns and utilize closed-book reinsurance deals. Their M&A strategy is robust, with notable strategic investments in international firms like M&G and Challenger (Dai-ichi Life) and Viridium (T&D Group).
Mutual Life Groups (Nippon Life, Meiji Yasuda, Sumitomo Life, Fukoku Life): Being unlisted, these insurers face less pressure from shareholders, allowing them to maintain higher capital levels. This capital strength enables them to be more aggressive in taking on investment risk. While they are also gradually reducing domestic equities, their pace is slower than that of the listed insurers. Notably, they do not conduct closed-book reinsurance transactions. Their appetite for M&A and strategic investments is very strong, demonstrated by major acquisitions such as Nippon Life's purchase of Resolution Life and Meiji Yasuda's acquisition of L&G America.

Part 4: The Impact of the Rise of Interest Rate in Japan

Koshiro Emura took over the presentation to provide a detailed technical analysis of how rising interest rates are impacting the sector, emphasizing the difference between accounting and economic value perspectives.

A. SMR (Accounting) vs. ESR (Economic Value)

Koshiro Emura explained the critical distinction between the existing Solvency Margin Ratio (SMR), based on Japanese GAAP, and the new Economic value-based Solvency Ratio (ESR).

SMR: Under the current SMR framework, there is a valuation mismatch. While some assets (like available-for-sale securities) are marked-to-market, liabilities are valued at book value using locked-in assumptions from the time of policy inception. Therefore, when interest rates rise, the market value of assets falls, but liabilities remain unchanged, causing a direct hit to net assets and the SMR.
ESR: The ESR, which forms the basis of S&P's credit analysis and the upcoming J-ICS regulation, values both assets and liabilities on a market-consistent, or fair value, basis. When rates rise, the market value of both bond assets and insurance liabilities falls. Assuming a well-matched duration, these changes largely offset each other, resulting in a much more stable impact on net assets (capital). This is why S&P considers the impact on capital to be broadly neutral from an economic perspective.

B. Unrealized Losses and "What Comes Next"

The rise in interest rates has already led to a significant decline in the market value of domestic bonds, erasing much of the unrealized gains that insurers held. This situation presents several forward-looking implications:

Heightened Impairment Risk: Further rate rises will increase the risk of bond portfolios triggering accounting impairments, which would directly impact insurers' profit and loss statements.
Portfolio Repositioning: To manage this risk, life insurers may be prompted to sell bonds with latent (unrealized) losses and reinvest the proceeds into higher-yielding instruments. They can offset these realized losses by selling assets with unrealized gains (e.g., equities), thereby protecting their periodic profits.
Increased Importance of Lapse Risk: Higher interest rates make older insurance policies with low guaranteed returns less attractive, increasing the risk of policyholders surrendering them (lapse risk). A mass lapse event could negatively impact the regulatory ESR.
Pressure on Over-Hedged Insurers: An insurer that is "over-hedged" (i.e., asset duration is significantly longer than liability duration) will see its capital come under pressure in a rising rate environment on an economic value basis. This is because the value of its assets will fall more than the value of its liabilities. Sony Life was mentioned as a company facing this particular challenge.

Conclusion

The S&P Global webinar painted a picture of a Japanese insurance sector in a state of managed transition. The industry has successfully built resilience through strategic de-risking and diversification. The move to an economic value-based framework (ESR/J-ICS) is aligning Japan with global standards and providing a more accurate picture of insurers' financial health, particularly in a volatile interest rate environment. While challenges such as managing unrealized losses, navigating M&A integration, and adapting to new regulations remain, the sector's strong capital base and proactive risk management position it well to maintain its stable credit profile in the years ahead.