Retained earnings, foundation funds buoy Nippon Life's capital

But its capital position is vulnerable to a slump in the Japan stock market.

Japan’s Nippon Life Insurance can sustain its capital strength through accumulating retained earnings and issuing foundation funds and subordinated debt, according to a Fitch Ratings report.

The insurer’s statutory solvency-margin ratio (SMR) on a consolidated basis remained high at 1,094% at end-December 2020 versus 1,048% at the end of the financial year to March 2020 (FYE2020).

However, its heavy exposure to domestic equities renders its capital position vulnerable to a downturn in the Japanese stock market. Its risky assets ratio was 138% at H1 FYE2021, the highest amongst its peers.

Nippon Life’s economic value-based capitalisation is bogged down by low rates due to an asset-liability duration mismatch. In response, the insurer has been cutting the interest-rate sensitivity of its surplus by lengthening the duration of its bond investments and narrowing the duration gap between its assets and liabilities, albeit at a slower pace.

On the other hand, its substantial morbidity and mortality margins will bolster profitability, Fitch said. Its core profit margin remained at 16% in H1 FYE2021, which is well above Fitch's financial ratio guideline for its rating category.

Whilst its annualised new business premiums for individual insurance declined 30% in 9M FYE2021 due to a drop in sales activity and slower sales of foreign currency-denominated products in light of the decline in interest rates, the decline in in-force business was limited to 0.6% by end-2020, underpinned by its substantial in-force portfolio.