Japanese Life Insurers' Domestic Bond Unrealized Losses Hit 30.86 Trillion Yen, Up 60%

Major Japanese life insurers saw unrealized losses on domestic bonds widen to 30.86 trillion yen ($194 billion) as of end-June, up 60% from a year earlier, as domestic bond yields continued to climb. The figure, compiled from a survey of 13 of 14 major life insurers, exceeded unrealized gains of 30.03 trillion yen on domestic stocks, which rose 48% year on year. The sharp expansion in bond losses was driven mainly by persistently higher Japanese government bond yields, with the 30-year yield reaching the 3.9% range at end-June, up about 2.7 percentage points from end-July 2023, when the insurers' combined unrealized positions had yet to turn to losses.

Japanese life insurers have traditionally invested in super-long-dated government bonds to match future payout obligations to policyholders. Nippon Life booked 44 billion yen in impairment losses in the April-June quarter, while Meiji Yasuda Life booked 25.3 billion yen. Some bonds purchased in the ultra-low interest rate environment of the late 2010s have seen their market values fall enough to trigger impairment losses.

The situation would be more severe if insurers need to sell bonds before maturity. Life insurers manage assets and liabilities to match the duration of investment assets with the duration of future insurance payout obligations. Sony Life's policy lapse and surrender rate rose 0.2 percentage point year on year to 1.4% in the April-June quarter, partly because rapid yen depreciation prompted more customers to cancel foreign-currency-denominated policies. T&D Financial Life's surrender rate rose 0.88 percentage point to 1.56%; the company has a strong presence in bank channel sales.

A surge in policy surrenders is the biggest concern facing life insurers. Although most insurers believe current surrender levels can be managed with existing cash, demand trends are closely tied to interest rate movements and difficult to predict accurately. Life insurers' earnings remain strong for now: the 14 major insurers posted combined core operating profit of 951.8 billion yen in the April-June quarter, up 37% year on year, with 12 companies reporting profit growth. Higher interest rates have increased interest income from bond holdings, while dividend income from stocks has also risen. To expand investment returns, insurers are shifting toward higher-yielding bonds, but these bonds also lose value more quickly.