April 23, 2014 3:51 am JST

Japan's life insurers buying riskier assets to boost returns

TOKYO -- Japanese life insurance companies are stepping up investment in real estate, stocks, foreign bonds and other assets that carry risk as they strive for more attractive yields.

     Nippon Life Insurance plans to invest 1.6 trillion yen ($15.4 billion) in fresh funds in fiscal 2014, increasing allocations in unhedged foreign bonds on the scale of 100 billion yen. The insurance giant ratcheted up such assets by 450 billion yen in fiscal 2013.

     Nippon Life expects the yen to soften by the end of the fiscal year next March, with the dollar likely to hover between 105 yen and 115 yen. It hopes to benefit from foreign bond yields, which are higher than those of Japanese government bonds, along with foreign exchange profit. Similarly, Mitsui Life Insurance plans to lift foreign bond investment by 50 billion yen.

     Rival life insurers are targeting other high-risk assets in search of attractive yields. Over three years starting in fiscal 2014, Sumitomo Life Insurance will supply 100 billion yen to growth fields such as energy, medicine and nursing care. It will first plow 20 billion yen to 30 billion yen into such areas this fiscal year. Fukoku Mutual Life Insurance plans to add around 10 billion yen in Japanese shares for the first time in six years, homing in on issues with high dividend yields.

     Dai-ichi Life Insurance has begun refocusing on real estate, investing in rental apartments in earnest. Meiji Yasuda Life Insurance plans to lift its weighting of high-yielding assets from the current 30%.

     Life insurers are diversifying beyond mainstay JGBs as long-term interest rates remain stuck at around 0.6%, owing to prolonged quantitative and qualitative easing by the Bank of Japan. With guaranteed yields of around 1% to new policyholders, negative spreads pose a threat down the road if they continue to invest primarily in JGBs.

     Instead, insurers are eyeing such assets as 10-year U.S. Treasurys, which yield nearly 3%, and real estate investments that offer returns of more than 3%. Life insurers owned a record 61 trillion yen in foreign securities as of Dec. 31, mainly overseas bonds. If U.S. quantitative easing is pared back and Japanese-U.S. interest rate differentials begin to grow, the insurers' foreign bond balance could swell.

     The financial strength of the insurers has returned to pre-Lehman-shock levels, thanks to rallying share prices. Solvency margin ratios are holding far above the 200% benchmark for financial health, allowing the insurers to take on a certain level of risk in their investment. With stocks and real estate comprising only about 5% and 2% of their overall investment assets, many see an opportunity to increase holdings.