Fitch Ratings has downgraded its ratings outlook for Japan's life insurance sector to 'negative' from 'stable', citing a high level of Japanese government bond (JGB) holdings and insufficient global business diversification.
The rating agency also revised its sector outlook to 'stable' from 'positive'.
Since the Bank of Japan began its substantial monetary easing programme, Japanese insurers have been increasing their allocation to overseas debt, in particular US Treasuries, to seek higher yields.
Combined with the depreciation of the yen, this has helped life insurers boost their investment spread – a trend that will continue unless the yen appreciates significantly, Fitch says. More foreign bonds in the portfolios also helps avoid over-concentration in JGBs. The average firm has just under 40% of its portfolio allocated to JGBs.
However, Fitch warned that insurers need to deal with their increasing currency risk and asset-liability management risk. Some insurers have hedged their currency risk on most of their increased position, the agency acknowledges.
Life insurers have been reducing the proportion of equities in their portfolios, but the rate of reduction is slowing, Fitch says, as most firms believe they have reached an optimal level. The average risky asset to adjusted equity ratio has fallen to 119% at the end of September 2014 from 215% at the end of March 2011. This is still high by international standards, according to Fitch.
Japanese insurers are on average running a five-year duration gap in their portfolios, but Fitch expects this gap to narrow as insurers will seek to extend the duration of assets when Japanese long-term bond yields rise – for example, when the 20-year JGB yield climbs above 2%.