Mega Japanese life insurance companies are employing different strategies in foreign fixed income as they seek to balance currency risks with lagging domestic yields.

Meiji Yasuda Life and Nippon Life Insurance plan to cut some foreign bond holdings to prepare for a stronger yen, while Sumitomo Life is expanding investments in overseas credit, the life insurer said in an announcement on Oct 18.

In addition, Sumimoto Life has decided to outsource all its two trillion yen ($17.6 billion) of foreign bonds to its US investment arm Symetra Investment Management for more efficient investment into higher yields. It manages $320 billion of assets as of March 31.

“Despite those what it perceives to be differing in strategies, where one insurer investing overseas, one bringing it back onshore, both are part of the toolkit and often it will just be tweaks here and there around particular asset-liability matching issues,” said Max Davies, insurance strategist at Wellington Management.

“But generally, we believe, and we have seen the long-term trend of increased investment overseas, and we expect that to continue, the longer the low-yield environment continues in Japan,” Davies said.

Max Davies, 
Wellington Management

Japanese life insurers have over $3.5 trillion of assets under management, with an average of 30% of positions in foreign fixed income, making them one of the world’s largest foreign bond buyers.

Recently, both Nippon Life and Meiji Yasuda Life - with combined assets of over $1 trillion – expressed concerns that the yen would rebound, as they expect the Federal Reserve will not raise interest rates until 2023 and the dollar would correct to below 110 yen after hitting a four-year high at 114.6 yen in mid-October. It has since dipped to 113.9 yen on Friday.

As a result, Nippon Life’s executive officer Shinichi Okamoto told a press conference in late October that the life insurer – the largest in Japan – plans to reduce foreign bonds that are not currency-hedged in the next few months to March, according to Reuters.

Instead, it will increase yen bonds, and cross-currency swap bonds to lock in hedging costs.

Similarly, Meiji Yasuda Life told a press conference that it planned to cut foreign sovereign bond investments with and without currency hedge in the second half of the financial year ended March.

To search for higher yields but also narrow the mismatch of its assets and liabilities, Meiji Yasuda Life plans to add positions in domestic bonds and foreign credit with a currency hedge. It will continue to increase total allocation to foreign bonds, the insurer said in late October, which is in line with the trend among Asian life insurers.

GO HOME OR OVERSEAS

“You can't invest a lot offshore, and you need to hedge that risk using derivatives to bring it back to your base currency, so there is always a consideration for these insurance companies when investing offshore,” said Wellington’s Davies.

“There is a trend we've seen in Japan that there’s is an interest in Japanese government bonds (JGBs) and that is principally because JGBs are issued by quite long durations. So there are 30-year or 40-year Japanese government bonds that allow these insurers to match their domestic liabilities,” he said.

Yields of super-long duration JGBs have been on the rise since April, with yield of the 40-year JGB rose from 0.65% to currently over 0.71%.

Japanese life insurers resumed their foreign credit hunt after nine months of net sells, especially in the US early this year, as the economy recovered, and bond yields started to pick up. The move from sovereign bonds to foreign credit has been a major trend for them as the former offers unattractive yields after currency hedging.

Teruki Morinaga,
Fitch Ratings

Currency risks and the mismatch between liabilities and assets duration have been a major consideration in Japanese life insurers’ bond strategies, as they prepare for a new economic value-based solvency regime in 2025, which could lead to higher risk charges for such mismatch.

“Japanese life insurers need at least 1% of yields after currency hedging from foreign bond investments to make profit,” noted Teruki Morinaga, director of insurance at Fitch Ratings Japan.

“If they invest in US Treasuries with currency hedging, the yields would be around zero or negative,” he said. The 10-year US Treasury yields were around 1.53% this week.

Although some insurers do plan to purchase more superlong yen bonds in the next six months, Teruki believes the amount would be small considering the less-than-1% JGB yields. The trend in the near future would still be more positions in quality foreign investment-grades, especially in the US, he said.

Noting that the Fed just announced to cut bond purchases by $15 billion per month, Teruki believes the move will have little impact on Japanese lifers’ overseas bond strategies.

“It really depends on future movements of the US market…If the hedging costs go high again because of any sudden rise in short-term yields, or the market becomes really unstable, they may go to other developed markets such as Europe for lower hedging costs,” Teruki said.

“As of now, the market seems to be relatively stable and we don’t see any immediate change, as moderate tapering is expected,” he added.