Japanese traditional life insurers have been increasing their exposures to assets denominated in foreign currencies in pursuit of higher yield while domestic interest rates remain low, says Fitch Ratings.
Foreign currency denominated assets, including bonds, equities and cash, more than doubled to 30% of total invested assets in the financial year ended March 2019 (FYE19), compared from FYE12, when the authorities lifted a limit on certain assets, including foreign-currency denominated assets.
Aside from the four largest life insurers, medium-sized traditional life insurers are also increasing their foreign-currency assets to boost investment yield.
Increase in unhedged exposures
Insurers do not publicly disclose their hedging ratios. Fitch estimated the Japanese traditional life insurers’ unhedged foreign currency exposures by reviewing their long positions in the derivatives based on the public disclosures.
Foreign currency exposures are particularly high at certain medium-sized life insurers. Unhedged exposures vary significantly among insurers and tend to fluctuate as insurers tactically change hedging ratios based on the spot rate, their market views and hedging costs.
The ratio of unhedged foreign currency exposures to insurers’ capital has been rising and reached over 100% at some insurers at FYE19. The rise in unhedged exposure has been driven by rising hedging costs and lower yields of US government bonds. Strategy Carries Higher Risks
A significant currency mismatch between assets and liabilities could further increase the volatility of the insurers’ earnings and capital.
Fitch-rated Japanese life insurers have been strengthening their capitalisation since FYE11, and generally maintain strong positions.
Japanese traditional life insurers are:
Big four traditional:
Nippon Life Insurance
The Dai-ichi Life Insurance
Meiji Yasuda Life Insurance and
Sumitomo Life Insurance.
Five medium-sized traditional:
Fukoku Mutual Life Insurance
Asahi Mutual Life Insurance
Daido Life Insurance
Taiyo Life Insurance, and
Taiju Life Insurance.