Negative Yields to Punish Insurer’s Profits: Ex-BOJ Official
Negative Yields to Punish Insurer Profits, Ex-BOJ Official Says
(Bloomberg) -- Miyako Suda, who opposed the Bank of Japan’s ultra-loose monetary policy as a board member, has a warning for the nation’s life insurers as bond yields sink ever lower.
This prolonged period of ultra-low rates will pressure profits as sovereign debt matures and has to be replaced with lower-yielding bonds, said Suda, who is now an external board member at Meiji Yasuda Life Insurance Co.
“As the duration of their JGB holdings shortens, insurers’ profitability will worsen if yields stay below zero,” the 71-year old said in an interview in Tokyo. “If they don’t change direction now, they will become poorer and poorer. The negative impact will become evident.”
While Japanese life insurers have sought to diversify away from JGBs by buying overseas debt, the cost of hedging against foreign-exchange volatility and a collapse in global yields have crimped their progress. Domestic sovereign bonds still make up almost 40% of the $3.5 trillion yen of assets they manage, little changed from two years ago.
Insurers are currently in the process of announcing their investment plans for the second half of the fiscal year, with most attention focused on the nation’s largest, Nippon Life Insurance Co.
With the Bank of Japan holding down its policy rate at negative 0.1% and suppressing bond yields through record asset purchases, the coupons on long-term debt have plunged. The most recent sale of 30-year bonds in October carried a coupon of 0.4%, compared with 2.80% for similar-maturity debt maturing in 2029.
Life insurers typically invest in longer-dated securities to match the liabilities on the policies they sell. JGBs with maturities of more-than 10 years make up 74% of their domestic debt holdings, according to Japan’s Financial Services Agency.
About 40 trillion yen ($368 billion) of 20-year government bonds will mature in the next five-to-six years, according to data from the Ministry of Finance
“There is a huge gap between the potential risks that await insurers and the sound profitability they are enjoying now,” Suda said, likening the life insurer industry to the Titanic.
An evaluation of insurers by the Financial Services Agency last year showed the average economic solvency ratio would drop to 100%, the minimum required to cover capital needs, if the yield on 20-year Japanese bonds fell to 0.051%. The yield was at 0.25% on Monday.
The ESR ratio, which measures whether life insurers have enough capital to meet their commitments, averaged 141% for the industry in March 2018, according to the FSA.
“The 100% solvency ratio serves as a threshold, a drop below which will severely limit their risk taking,” said Suda, who sat on the BOJ board from 2001 to 2011.
The BOJ shouldn’t deepen negative rates unless it can also prevent bond yields from sliding, Suda said. The decline in benchmark 10-year yields to the brink of a record low last month indicates the challenge for the central bank, she added.
One option that could help insurers would be for the BOJ to do a so-called reverse operation twist wherein it buys shorter-term bonds and sells longer-maturity ones, she said.
To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net;Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds
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