Japanese insurers on a global fixed-income hunt

With strong fundamentals, money to spend, and better credit ratings, Japan's insurers are increasingly looking abroad for better risk-adjusted returns.
Japanese insurers on a global fixed-income hunt

A combination of carrot and stick is prompting Japan's cash-rich and increasingly powerful insurers to beef up and broaden out their investments in overseas fixed income markets, a scan of recent company updates and feedback from industry experts shows.

While the biggest players are set to make full use of their in-house capabilities and global reach to diversify into US corporate bonds and more niche areas, smaller ones are likelier to turn first to euro-denominated bond markets, where the hedging costs are lower.

The trend underlines how the double whammy of low-yielding Japanese government bonds and high hedging costs for US government bonds is spurring Japanese insurers to cast a wider net in their quest for better risk-adjusted returns.

But it also comes at a time when the sector is enjoying bumper profits thanks to the lucrative health and death protection products that Japanese insurers sell, giving them an edge over their US and European counterparts, according to Teruki Morinaga, director of insurance at Fitch Ratings Japan.

“The profitability of the protection-type products is good for insurers in Japan, who have a very thick profit margin, which is creating a large sum of capital to bolster balance sheets and invest,” he told AsianInvestor.

That growing financial strength is increasingly recognised by the credit rating agencies. In late March, for example, Fitch lifted its ratings of Sumitomo LifeMeiji Yasuda Life, and Sompo Japan Nipponkoa to A+ – that is, above the Japanese government's sovereign debt rating.

“Some Japanese insurers are improving their fundamentals,” Morinaga said. “Going forward, they will not be automatically capped by Japan’s sovereign rating. If we believe that a company’s fundamentals are improving, we will therefore take positive action.”

As the most indebted sovereign on earth, with a gross-government-debt-to-GDP ratio of 230%, Japan's credit rating was affirmed at just A by Fitch in January. That's five notches below Fitch's top AAA rating. 

Among the upgraded insurers that plan to invest more in foreign bonds are Sumitumo Life and Meiji Yasuda Life. Asahi Life, which is rated just BBB- but was assigned a positive outlook by Fitch just this month, is another.

“The domestic yield will probably continue to stay low this year, so we will continue diversifying our investments in foreign bonds and alternative products just like last fiscal year,” Masataka Matsumoto, head of the asset allocation and planning department at Asahi Life, told Reuters on April 23.

Another recent recipient of a Fitch ratings upgrade is Osaka-based Nippon Life, which as of March 31, 2018 had total assets of ¥74.4 trillion ($667 billion) on a consolidated basis. Here, the overseas investment ambitions for the financial year through March 2020 are to trim FX-hedged US Treasury bond holdings and to increase holdings of unhedged foreign bonds. It is also to increase alternative investments, including real assets, according to recent statements by the firm.

“The very big insures such as Nippon Life and Dai-ichi Life have big research teams in-house, so they have started to invest in corporate bonds in the US, the single-A rated ones,” Morinaga said.

Overseas alternative allocations, meanwhile, will most likely favour infrastructure debt, which could hold some regulatory advantages over other types of investments, as highlighted also by Korean insurers.

Still, there will still likely be less appetite for alternative assets such as private equity, hedge funds and real estate compared with US and European insurers, Morinaga said.

“Even the very big guys think that to manage illiquid credit assets from Tokyo may not be that easy. I expect that illiquid assets will be accumulated in a very slow and prudent manner,” he said.

In comparison, alternative investments are a hot topic among Japan's pension funds, not least Government Pension Investment Fund, the world largest pension fund.

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