Japanese life insurers increasing allocations to overseas corporate bond investors

Written by Adam Cadle

25/01/2021

More and more major Japanese life insurers’ capital is being allocated proportionally to take on credit risk by increasing overseas corporate bond investments.

According to AM Best, this trend is aimed at earning a higher expected spread to improve overall risk-return profiles.

Japanese life insurers have recognised the need to reduce their exposure to market risk, have have sought to mitigate such risk further by enhancing asset-liability management. Most major domestic life insurance companies have taken steps to reduce the market risk in their investment portfolios, AM Best said. Insurers have been proactively expanding their purchases of super long-dated Japanese government bonds to narrow the duration gap, while several have continually cut back on their holdings of domestic equities and unhedged foreign currency bonds.

AM Best is of the view that Japan life insurers’ operating return on embedded value (operating ROEV)  - a gauge of an insurer’s ability to raise its corporate value or embedded value in the absence of economic and other non-operating variances - will remain suppressed over the short to medium term, as the social and economic impacts from the COVID-19 pandemic, as well as the adverse effects of low interest rates domestically and overseas, are likely to persist for at least several years.

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