After Taiwan's life insurance, Japan's life insurance faces "huge losses," as the long-term bond storm hits Asian life insurance

Japan's emergency measures to stabilize the bond market have temporarily alleviated the storm of Japanese bond sell-offs, but the crisis has not truly been resolved. With the major losses faced by Japan's life insurance giants, will they resort to selling off their holdings?

Following the impact of U.S. bonds on Taiwan's life insurance industry, Japan's four major life insurance companies have reported massive losses, with paper losses reaching 8.5 trillion yen in the last fiscal year, equivalent to about 60 billion USD, a threefold year-on-year increase.

Moreover, life insurance companies across Asia are facing billions of dollars in paper losses, while Japanese life insurers are confronted with the additional risk of further interest rate hikes by the central bank.

The underlying issue is the mismatch in durations. Japanese life insurers hold a large amount of ultra-long-term government bonds, such as 30-year and 40-year Japanese bonds. As Japanese long-term government bonds plummet and interest rates rise, Japanese insurance companies are facing significant paper losses; meanwhile, Taiwan's life insurance industry has invested heavily in U.S. bonds and is hastily reducing or hedging its dollar exposure as the New Taiwan Dollar appreciates.

For Japan, the more challenging aspect is that rising interest rates are forcing life insurers into a death spiral of passive selling. If interest rates continue to rise, it will lead to further bond devaluation and greater paper losses, compelling insurance companies to sell off more of their holdings.

Long Bond Storm Hits Asian Life Insurance

On May 26, data disclosed by Meiji Yasuda Life Insurance Company was like a bombshell: as of March this year, the company's paper losses on domestic Japanese bonds surged more than eightfold from 161.4 billion yen to approximately 1.386 trillion yen.

This is not an isolated incident—Japanese life insurance companies reported paper losses of 3.6 trillion yen on Japanese bonds in the last fiscal year, a year-on-year increase of twofold; Sumitomo Life Insurance's bond paper losses more than doubled to 1.518 trillion yen. Data shows that the four major life insurance companies in Japan faced paper losses of up to 8.5 trillion yen in the last fiscal year, equivalent to about 60 billion USD, a threefold year-on-year increase.

Meanwhile, according to statistics from Taiwan's Financial Supervisory Commission, the net worth of Taiwan's life insurance industry sharply dropped to 2.4172 trillion NTD at the end of March, the lowest point in nearly 11 months, with a monthly decrease of 222.8 billion NTD, marking the largest monthly decline in two and a half years, nearly approaching the dire situation of the 2022 life insurance net worth crisis.

Analysts indicate that life insurance companies across Asia are facing billions of dollars in paper losses amid the recent market crash.

This predicament stems from the characteristics of their business model: as major buyers of ultra-long-term bonds with maturities of 30 years and 40 years, they need long-term assets to match the policy payout demands decades later. However, this seemingly robust strategy has turned into a fatal weakness in a rising interest rate environment.

Is Forced Selling of Japanese Bonds the Next Step?

The more pressing issue is that rising interest rates are forcing insurance companies into a death spiral of passive selling. On one hand, as interest rates climb, policyholders may cancel their policies in favor of higher-yielding financial assets, forcing insurance companies to use cash for payouts and sell off their bonds. On the other hand, with new bonds being issued at higher yields, insurance giants may proactively sell low-yielding bonds to free up funds for purchasing higher-yielding new bonds This dynamic may lead to further intensification of bond sell-offs—if interest rates continue to rise, it will result in more bond devaluation and greater paper losses, creating a self-reinforcing downward cycle.

In the face of potential chain liquidation risks, Toshihiro Matsuo, a director at S&P Global Ratings, claimed that Meiji Yasuda's unrealized bond losses are "neutral" to its credit quality, reasoning that the company "holds sufficient unrealized gains in listed stocks to absorb bond losses if necessary."

Some analysts also believe that unrealized bond losses do not necessarily lead to actual sell-offs, as insurance companies tend to hold bonds until maturity. However, the lessons from the collapse of Silicon Valley Bank in March 2023 are still fresh.

When insurance companies shift from "paper losses" to "realized losses" and are forced to sell off more positions, the sell-off will evolve from a trickle to a torrent, potentially leading to the collapse of the world's second-largest bond market.

Currently, the Bank of Japan is facing an intractable dilemma: if it raises interest rates, it will force life insurance companies to liquidate; if it does not raise rates, it will trigger a collapse of the yen and soaring inflation.

Nobuji Takao, an executive director at Sumitomo Life, also stated that considering the significant rise in ultra-long-term bond yields, the possibility of further increases is low. However, if bonds resume their decline, even if the drop has not yet reached a level that requires consideration of write-downs, insurance companies may still need to sell off some positions