Japan's four biggest life insurers posted record paper losses on bonds, and their solvency ratios went up

Unrealized losses on domestic bonds held by Japan's four largest life insurers reached a record 15.13 trillion yen, about $96 billion. That is 7% more than the previous quarter, and the seventh straight quarterly increase.

The figure Bloomberg reported first covers Nippon Life, Dai-ichi Life, Sumitomo Life and Meiji Yasuda together, and all four saw their paper losses grow. Nippon Life alone accounts for 6.28 trillion yen. An unrealized loss is the gap between the book value of a bond you have not sold and what it would fetch today. When rates rise, bonds bought at lower rates are worth less, so a loss shows up in the numbers even though nothing has been sold.

Why the ultralong bonds belong to insurers

A life insurer is a company that has promised to pay out decades from now. To line its assets up with that promise it has to hold assets with very long maturities, and in Japan the 30-year government bond fills that slot. The 30-year was first issued in 1999, and life insurers are close to the only natural buyer for it. That 30-year yield rose above 4% on May 15 this year, the first time since the bond was created. Worries that Prime Minister Takaichi's cabinet may widen fiscal spending were named as the reason. At the August 6 auction it priced at 3.9% on an average basis.

The yardstick changed at the end of March

Since the end of March this year, Japanese insurers' solvency has been measured on a new standard. It marks not only assets to market but also liabilities, meaning the obligation to pay policyholders. That is where the direction flips. A life insurer's liabilities run longer than its assets, so when rates rise the present value of the liabilities falls by more than the value of the assets. Capital is assets minus liabilities, so on this yardstick a rise in rates pushes capital up.

In the first mandatory disclosure Nippon Life came in at 195% on a consolidated basis and the Dai-ichi Life group at about 220%. Dai-ichi was roughly 10 points higher than a year earlier. The regulatory floor is 100%.

The same rise in rates lands on opposite conclusions depending on whether you look only at the bond side of the book or at the liabilities alongside it.

What the November filing will show

The bridge between the two readings is cancellations. That is what the original post was worried about. If policyholders surrender in bulk, bonds meant to be held to maturity have to be sold at a loss, and at that moment a paper loss becomes a real one. The numbers on hand do not point that way yet. The Life Insurance Association of Japan puts the lapse and surrender ratio for individual policies at 5.6% in fiscal 2024, down 0.3 points from the year before. Figures covering the first half of this year, when yields jumped hardest, are not out. So whether Japan's life insurers are weaker or sturdier is settled by the surrender rate rather than by bond prices. If surrenders stay near 5%, the losses stay a number on a page; if that rate starts climbing in earnest, the same rise in rates works against what the solvency ratio is saying. The end-September figures land in November.