Japanese life insurers’ earnings will remain flat in their financial year to next March, according to Fitch Ratings.

Low bond yields – 0.5% on 20-year Japanese government bonds – continue to put pressure on earnings, the ratings agency says.

However, Fitch believes Japanese life insurers’ consolidated earnings will remain strong due to their overseas operations.

And the overseas buying spree will continue as they strive to diversify risks.

“The insurers are continuously accumulating regulatory capital, partly through hybrid debt issuance, to cope with sizeable overseas acquisitions, achieved by taking advantage of extremely low bond yield worldwide and investors’ appetite for yield,” Fitch says.

The ratings agency also notes areas of concern.

“Fitch expects interest rate risk will remain the primary risk because most Japanese life insurers are unlikely to lengthen asset duration due to persistently low bond yields in Japan.

“Fitch believes Japanese life insurers will continue to increase their investment allocation to high-grade foreign bonds, with some currency hedging to seek higher yield.”

Last financial year, the major life insurers increased their foreign securities exposure to 27% of total invested portfolio from 26% the previous year.

Fitch has maintained its neutral stance on the sector.

“Fitch does not see life insurers’ credit fundamentals worsening, despite continuously low Japanese fixed-income yields. This is mainly due to their stable profit stream from the seasoned inforce portfolio of profitable protection products.”