Japan Insurers Bone Up on Foreign Bonds -- WSJ
October 29 2016 - 3:02AM
Dow Jones News
By Kosaku Narioka and Eleanor Warnock
TOKYO -- Japanese life insurers are being forced to take on
greater corporate risk abroad because of the ultralow interest-rate
environment engineered by the Bank of Japan, creating a new set of
challenges for investment managers.
Japanese life insurers, which are closely watched around the
globe because they control nearly Yen350 trillion ($3.3 trillion)
in assets, traditionally invested mainly in yen-denominated bonds.
More recently, they have expanded into foreign government bonds as
yields at home have fallen to historic lows.
Now, the lack of safe foreign government bonds that offer
sufficient return is prompting the insurers to take on the greater
risks associated with financing companies abroad.
"We are investing in assets that have some spread, mainly
foreign corporate bonds such as U.S. ones," Iwao Matsumoto, general
manager for investment planning at Sumitomo Life Insurance Co.,
said Thursday. "Investments in Treasurys don't generate
returns."
Mr. Matsumoto said Sumitomo Life was buying billions of dollars
of foreign corporate bonds each year, hedged against the yen's
strength, as part of its midterm strategy. Sumitomo Life said it
boosted its holdings of foreign bonds by Yen1 trillion in its
fiscal first half ended in September.
Japanese government bonds with terms of up to 10 years have
carried a negative yield for most of this year, which makes them
useless for life insurers trying to earn a return on the money
entrusted to them by policyholders. While the 10-year U.S. Treasury
currently offers a much better yield -- around 1.86%--investment
managers in Japan say that return is almost entirely erased by the
cost of hedging against yen-dollar fluctuations.
Investing in corporate bonds and other credit-linked products
overseas requires Japanese life insurers to develop new skills.
Many say they are hiring more professionals with expertise in
assessing industry conditions overseas and corporate risk. Sumitomo
Life regrouped its investment departments this October to better
manage credit risk associated with nongovernment bonds.
While the corporate-default risk hasn't materialized in any
significant way, unhedged non-yen investments also pose a currency
risk if the yen rises, and some insurers have suffered a blow this
year.
Meiji Yasuda Life Insurance Co., which has aggressively bought
foreign bonds in recent years, saw a Yen300 billion valuation drop
in its foreign-debt portfolio owing to a higher yen in the
half-year ended in September.
Life insurers generally declined to name specific corporate
bonds they were buying, but Nippon Life Insurance Co.'s manager of
investment planning, Kazuo Sato, said his firm was avoiding energy
and cyclical industries. Since 2014, Nippon Life has added about
Yen1 trillion to its foreign credit investments, bringing the total
to nearly Yen3 trillion.
Japan Post Insurance Co., the insurance arm of Japan Post
Holdings and Japan's largest life insurer by assets, said this week
it had begun investing in bank loans in the half-year that ended in
September and would consider investing in private equity or hedge
funds in coming months. These investments would increase Japan
Post's exposure to corporate credit risks.
The company plans to hire around 20 specialists in foreign
credit and alternative investments by the end of March.
"Until now, we invested in a conservative, safe way, so I
believe we have room to increase our holdings of risk assets," said
Tomoaki Nara, senior general manager in the investment planning
department.
Not everyone is willing to take greater risks in the corporate
bond market. A recent Bank of America Merrill Lynch survey of fund
managers found investment-grade U.S. and European corporate bonds
were one of the "most crowded" trades, signifying possible
overvaluation.
Yasuyuki Watanabe, deputy general manager of investment planning
at Dai-ichi Life Insurance Co., said it was limiting new
investments in low-grade U.S. debt. "We have a cautious view on the
U.S. credit cycle in the next couple of years," he said.
Mr. Watanabe said that in the half-year ended in September,
Dai-ichi Life invested more than Yen100 billion in what it calls
"new fields," including aircraft financing and infrastructure. He
said, however, that Dai-ichi did away with numerical targets for
such investments after finding some asset prices in those areas
rose sharply.
Write to Kosaku Narioka at kosaku.narioka@wsj.com and Eleanor
Warnock at eleanor.warnock@wsj.com
(END) Dow Jones Newswires
October 29, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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