DCNSF Dai Ichi Life Insurance Company Ltd (PK)

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.