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Japan life insurers eye foreign stocks

Some of Japan’s life insurers are buying overseas stocks to help boost investment returns while sticking with domestic sovereign debt as a safe haven, several of the companies said in interviews with Reuters.

A sluggish global economy and the euro zone’s fiscal woes are keeping the yields of major sovereign bonds near record lows, reducing their appeal and increasing that of stocks.

Nine of the biggest Japanese life insurers, boasting a formidable war chest of 112 trillion yen ($1.39 trillion) in financial assets, have lost some of their appetite for foreign bonds, which yield only a bit more than Japanese debt and incur high hedging costs.

That is why the firms plan to keep topping up domestic bond holdings, helping them match assets to long-term yen liabilities, while putting money into emerging markets.

Industry leaders such as Nippon Life and Meiji Yasuda are looking to buy foreign equities this fiscal year ending March. Nippon Life and Meiji Yasuda both specified they will aim to tap growth in emerging markets.

“When it comes to foreign investment, emerging economies have bigger growth potential than the United States and Europe and that’s where I would like to boost our investment,” said Yosuke Matsunaga, general manager of Nippon Life’s finance and investment planning department.

The financial behemoth, with total assets of 49 trillion yen, plans to buy around 100 billion yen of foreign stocks after adding 290 billion yen in the last fiscal year, with more than half of that amount earmarked for investment in emerging markets.

It is mostly interested in the so-called BRIC nations of Brazil, Russia, India and China.

FOREIGN VS DOMESTIC STOCKS

Meiji Yasuda, the industry No. 3, is targeting growing Asian markets. It plans to boost holdings in foreign stocks to around 75 billion yen by the 2013/14 fiscal year from 28 billion yen now.

In contrast, none of the insurers plans to increase Japanese stock holdings this fiscal year and many have trimmed equity portfolios in recent years to deal with government regulations that raise the risk weighting for stocks and other assets.

Since the end of February 2009, the MSCI emerging market index has grown over 100 percent, compared to a rise of 25.8 percent in the Nikkei stock average of major Japanese companies.

Japanese insurers are moving away from traditional investment territory because of the uncertainties in the global economy sparked by factors such as the lack of a palpable pick up in the U.S. job market.

“We think the U.S. housing and job markets will still continue adjustments and the Fed will keep an easy stance,” Takashi Iida, manager of Dai-ichi Life’s investment planning department, told a group of reporters.

YIELDS CAPPED

Most Japanese insurers limit foreign bond investments to U.S. Treasuries and German Bunds, staying away from higher yielding, bu t riskier sovereign debt. This includes debt issued by Italy and Spain because of their potential exposure to the euro area debt crisis.

The 10-year U.S. Treasury note yield stood at 1.88 percent , just about 100 basis points over the 10-year Japanese sovereign bond yield and less than half of the yield advantage of more than 200 basis points it had until last June.

The 10-year German yield fell to a record low of 1.549 percent last Monday, as investors continued to flock to German bonds and shun debt of Spain and Italy.

Some insurers started selling French sovereign debt holdings last fiscal year, underscoring their extremely risk-averse strategy and the dilemma that such investors face amid a rapidly shrinking pool of assets deemed as safe.

One of them was Daido Life, with some 5.16 trillion yen in assets, which sold “vast amounts” of French bonds and all of its Italian bond holdings in the last fiscal year.

“Compared to Italy and Spain (the French situation) is much better ... but if a new wave of crisis strikes, its bonds may be sold off,” said Takashi Ikawa, general manager of Daido Life Insurance Co’s investment planning department.

“In a crisis situation, German debt is the safest. I want to buy more of it, but yields on it are very low so it’s hard to be very specific at this stage,” said Ikawa, adding he does not hold any bonds from Portugal, Ireland, Greece or Spain.