More warning bells are being sounded about Japanese insurance firms' growing hunger for higher-yielding assets. This time it is two of the country's – and indeed Asia's – biggest players sparking concerns.
Meiji Yasuda Life, with ¥37.2 trillion ($336.2 billion) under management, and Nippon Life (with ¥65 trillion) plan to increase their exposure to domestic and foreign credit by a combined $33 billion over the next few years. Such moves will increase the risk levels and shorten the duration of their portfolios, noted rating agency Moody's.
They signal the adoption of a more aggressive strategy by using higher-yielding credit investments to promote new policy growth, said the firm in a report on March 27.
Meiji Yasuda said on March 15 it aimed to invest ¥2.1 trillion ($19 billion) in foreign and domestic credit (¥800 billion in each), including ¥500 billion of “sustainability investments and loans”, between fiscal 2017 (ending March 31, 2018) and fiscal 2019.
Similarly, Nippon Life announced two days later that it would expand its investment and finance in “growing” fields by ¥1.5 trillion – including ¥200 billion in environmental, social and governance-related bonds – between fiscal 2017 and fiscal 2020.
Both firms are looking to boost returns to match the level of rates they have guaranteed on the liability side of their balance sheets, he told AsianInvestor. “To boost new policy generation they need to secure a certain level of yield, and they cannot do it with Japanese government bonds.”
JGB 20-year yields have recovered from their trough of below 0.1% in June last year, but are still standing at just 0.65%, down from 1.0% in January.
Corporate bond chase
"We believe developed-market corporate bonds are the most likely targets for the two insurers," said Soichiro Makimoto, a Moody's analyst.
Others make a similar point. Japanese insurers are steadily increasing their exposure to very high-grade (at least A-rated) foreign bonds, particularly US and to a smaller extent Australian debt, said Teruki Morinaga, a director in the insurance research division at Fitch Ratings in Tokyo.
“Japanese life insurers acknowledge that their foreign credit research capabilities are still limited, so they are focusing on safer assets,” he told AsianInvestor late last month. In recognition of this, the biggest firms – such as Dai-ichi Life and Nippon Life – are beefing up their credit research capabilities, he added.
Meiji Yasuda Life did not give specific details of what it means by “sustainability investment and loans” or details of what it has already invested in such assets, Moody's Makimoto told AsianInvestor.
Meanwhile, it is not clear how much the two insurers will outsource of their new investments, said Makimoto. Fund houses would clearly love to know, because even a tenth of those allocations would represent a huge chunk of capital.
"Indiscriminate" yield hunt
However, some in the industry express concern that Japanese insurers' increasingly aggressive hunt for yield may land then in hot water.
“There is a lot more aggression out there, which last time brought me a lot of attractive M&A fees when I spent my time rescuing the people who had gone too far,” said Ian Brimecome, senior executive officer at Tokio Marine, Japan's biggest property-and-casualty insurer by revenue.
What the London-based veteran sees across the industry worries him. “The issue is a more indiscriminate chase for yield,” he told AsianInvestor in August.