Insurance-linked assets divide Japan’s corporate pensions

While some have divested, others have put their faith in securitised products that shift the risk to the capital markets.
Insurance-linked assets divide Japan’s corporate pensions

Japanese corporate pension funds are dividing over insurance-linked investments, with some having quit the asset class altogether or considering doing so, while others continue to favour the products.  

Konosuke Kita

For many defined benefit corporate pensions, non-life products that focus on natural disasters, have particularly lost their appeal.

Insurance-linked securities (ILSs) became popular from around 2010 because they offered stable returns for several years, and several Japanese pension funds invested in them, according to Konosuke Kita, director of consulting at Russell Investments in Japan.

“But a series of disasters in 2017 to 2019 brought damages. I expect more than half of investors will continue, but a considerable number of pensions may quit investing,” Kita told AsianInvestor.

Yoshi Kiguchi, the chief investment officer at Okayama Metal & Machinery Pension Fund and West Japan Metal & Machinery Pension Fund, is one investor who has already divested insurance-linked investments.

“They became less attractive, so we already sold all the insurance-linked investments during 2018 and 2019,” Kiguchi, who manages a total of $1.2 billion of assets, told AsianInvestor.

Yoshi Kiguchi

One example of an ILS is a catastrophe bond, a high-yield debt instrument designed to raise money for insurance companies in the event of a natural disaster. If an event protected by the bond activates a pay-out to the insurance company, the obligation to pay interest and repay the principal is either deferred or completely forgiven.

In recent years, natural disasters have become more common, and that has facilitated a lower demand for cat bonds among investors. For instance, in 2019, Australia and California were ravaged by fires. In the same year, Japan saw increased typhoon activity, and in September 2018, typhoon Mangkhut wreaked havoc across Southeast Asia and mainland China. In 2017, the US saw three large hurricanes; Harvey, Irma and Maria. 


Another segment of the ILS market is life insurance securitisation. Life insurance-linked products are subject to mortality and longevity risks, and a jump in mortality rates would adversely affect how much death benefits an insurer must pay. Longevity risk is the opposite. Securitisation allows the transfer of such risks to the capital markets. 

While others have divested, Hiroshi Sumiya, managing director and director of investment at Aisin Employees’ Pension Fund, plans to stick to the fund’s life insurance-linked investments. Furthermore, the Aichi-based fund, which manages the pension savings for employees at auto parts industrial manufacturer Aisin Group, expects to add more non-life insurance products in 2020.

“We will also look at non-life insurance-linked investments. This is to balance the weight between non-life insurance-linked and life insurance-linked investments within our portfolio,” Sumiya told AsianInvestor.

Kosuke Okimori,
Kewpie Pension Fund

He still sees the appeal of non-life products, albeit the asset's volatility in recent years.

“We understand the risks regarding natural disasters,” Sumiya said.

He declined to reveal the Aisin fund’s current total assets under management. However, Sumiya’s predecessor, Hisashi Hatta, told Asianinvestor in July 2019 that the fund had ¥205 billion ($1.9 billion) in pension savings, of which 5% was insurance-linked investments.


At Kewpie Pension Fund, executive investment director Kosuke Okimori, has become somewhat lukewarm towards insurance-linked investments, especially due to the global increase in natural disasters. However, he still sees potential.

“I want to believe that the risk is adjustable by science because the insurance companies are still profitable. So I would like to insist that managers can adjust the risk and improve their performance backed by science. But so far, nobody is successful,” Okimori told AsianInvestor.

While many Japanese pension investors have their doubts, insurance-linked products were popular during 2019. According to the Artemis Deal Directory, cat bond and ILS issuance reached $3.3 billion in the fourth quarter of last year, which is $1.1 billion above the 10-year average for the quarter. The $3.3 billion of total new risk capital issued in the quarter came from 15 transactions consisting of 28 tranches of notes.

Since 2015, only once has issuance in the final quarter of the year exceeded the $2 billion mark. So, the fact it is now more than $3 billion is impressive. Combined with the previous three quarters of the year, fourth quarter issuance for 2019 took the total outstanding market size to a record end-of-year high, of $41 billion.

Despite falling over $2.7 billion year-on-year, issuance levels remained above the $10 billion mark for the third consecutive year. At $11.1 billion, catastrophe bond and ILS issuance in 2019 was the third-highest ever recorded, according to Artemis’s data.

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