Nippon Life shows robust capitalisation, profitability faces pressure from forex: Moody’s

Nippon Life's economic capitalisation improved to 244%.

Japan-based insurer Nippon Life is expected to hold strong capitalisation and market standing but might face profitability pressures, according to Moody’s.

However, its capitalisation and market standing may be tempered by weaker asset quality compared to global peers of similar rating.

Additionally, the insurer's profitability could be duress due to elevated hedging costs for foreign currency exchange risk tied to its foreign investments.

Nippon Life's economic capitalisation has notably improved, evident in its high economic solvency ratio of 244% as of 31 March. 

This improvement stems from efforts to reduce interest rate risk, bolstered by business growth and market recovery. The forthcoming economic capital regulation in Japan encourages Nippon Life to continue proactive capital management.

With a premium market share about four times the norm for Japanese life insurers, Nippon Life maintains the largest share in Japan. Its established presence, extensive sales force, and national brand contribute to this strong position.

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However, Nippon Life's relatively high holdings of domestic equities compared to peers (13.8% of general account assets as of March 2023) exposes its capitalisation to market volatility.

Furthermore, the significant costs of hedging foreign currency risk for overseas assets affect Nippon Life's investment yield, though rising domestic interest rates will help mitigate this by increasing yields on new Japanese government bonds.

The stable outlook reflects Moody's expectation that Nippon Life will sustain its robust capitalisation and market position over the next 12-18 months.