Nippon Life Insurance’s move is in line with the insurance industry’s efforts to divert funds into foreign corporate bonds and alternative investments, however the rise of interest rates in the U.S. is likely to pose a challenge to its strategy of diversifying its returns.
The president of Japan’s Nippon Life Insurance Co stated, it is scouting for opportunities to purchase boutique managers of bonds and alternative assets.
“Asset management is a business that can generate synergy with life insurance and it needs to be operated globally. We have been looking widely for potential partners,” said Yoshinobu Tsutsui.
Japan’s biggest life insurer, in the private sector, ramping up its asset management overseas is in line with the island nation’s insurance sector which is increasingly shifting fund flows away from the country’s government bonds into higher yielding and riskier foreign corporate bonds, in order to diversify their returns.
In Japan, insurers have been hurt by diminishing return on investments in the country following its central bank, the Bank of Japan, launching aggressive monetary easing in April 2013.
In December, Nippon Life announced a deal to acquire a 24.75% stake in TCW, which it purchased from private equity firm Carlyle Group LP (CG.O).
Nippon Life has nearly $653.25 billion (74 trillion yen) in assets.
According to Tsutsui, potential targets for Nippon Life Insurance are asset management companies with expertise in bond investments since its insurance portfolio is primarily made up of fixed-income products.
He went on to add, Nippon Life Insurance is also on the lookout for specialists in alternative investments, whose real estate and other portfolios offer diversification from conventional bond and stock investments.
“As we have to diversify investment assets globally, alternative is a very important field,” said Tsutsui. “The United States has a very big and deep market for asset management. There are huge companies but there are also small but unique boutiques. We would like to keep looking there”.
With a rise in U.S interest rates, which will act as a headwind in its efforts to increase foreign bond holdings, Tsutsui said Nippon Life Insurance will curb fresh investment.
“Hedging costs will rise with U.S. rate increases, that will diminish returns (from U.S. Treasuries),” said Tsutsui.
Incidentally, Japanese insurers usually hedge against currency swings when they buy foreign assets to protect their yen-denominated value.
“There is an issue of how to build foreign bond portfolios and French government bonds are in the spotlight now,” said Tsutsui, who became the company’s CEO in 2011.
According to sources with direct knowledge of the matter, in efforts aimed at boosting its bancassurance sales, the firm is in talks with U.S.-based MassMutual Financial Group to buy a majority stake in the Japanese unit of the U.S.-based Group.
Tsutsui however declined to divulge the MassMutual talks saying his company has been searching for ways to build up domestic sales channels in addition to traditional door-to-door sales representatives.
“For bank branch sales channel, we are thinking about mergers and acquisitions,” said Tsutsui.
($1 = 113.2800 yen)