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Japanese government bond (JGB) yields have risen sharply in recent weeks, drawing attention to the potential impact on the nation’s insurers. Nippon Life, the world’s third-largest life insurer by reserves, reported a significant increase in unrealised losses on its domestic bond holdings, with losses growing from ¥1.0 tn to ¥3.6 tn ($25 bn) over the fiscal year ending March 31.
This development is partly attributed to insurers’ substantial investments in long-dated JGBs in anticipation of a new solvency regime that commenced on April 1. While rising yields have led to material unrealised losses, it’s important to note that such fluctuations are not uncommon, notes TwentyFour Asset Management in a recent market insight. Japanese insurers have previously experienced significant unrealised gains in equities, which are treated similarly in accounting terms, the boutique of the Swiss-based Vontobel Group explains.
“It is worth highlighting that for Japanese life insurers, the duration of policyholder liabilities tends to be longer than that of assets,” says Jakub Lichwa, a member of the Multi-Sector Bond portfolio management team at TwentyFour. “This means the net impact of higher rates on insurers’ equity can be positive,” he adds.
For instance, despite the changes in investment values, Nippon Life’s economic value-based solvency ratio (ESR) only decreased by two percentage points to 222%, well above the regulatory minimum of 100%
And unlike banks, Japanese life insurers include unrealised gains and losses in their regulatory capital ratios, meaning the effect on solvency is more transparent. Moreover, insurers face less risk of sudden outflows than banks, whose liabilities (like deposits) are more flight-prone.
“It is true that higher interest rates increase lapse risk for insurance policies (i.e. the early redemption of policies), given there are more attractive alternative investments available to investors out there,” Lichwa adds, “However, Japanese life insurers have generally seen low levels of lapse risk in the past, even when rates trended higher in 2022 and 2023, according to data from The Life Insurance Association of Japan.”
The portfolio manager concludes that while the sharp rise in JGB yields is a significant development with potential market-wide implications, it does not currently pose a material threat to the solvency of Japanese life insurers. He emphasizes that the situation remains contained—provided that higher yields do not trigger broader stress in Japan’s equity or credit markets.
