Japanese life insurers expand alternative investments | Asset Owners

Japanese life insurance companies are slowly but surely increasing their exposure to alternatives, with a focus on overseas investments.

Soichiro Makimoto

Moody’s Ratings

“Insurers are gradually increasing their allocation to private, illiquid assets such as infrastructure financing and investments, private debt, and private equities mainly in US markets,” Soichiro Makimoto, vice president and senior analyst at Moody’s Ratings in Japan, told AsianInvestor.

Dai-ichi Life Insurance, Japan’s largest listed life insurer with a ¥33.9-trillion ($219-billion) portfolio, is for instance moving into alternative assets through both fund vehicles and direct venture capital (VC) investments.

Teruki Morinaga

Fitch Ratings

However, alternatives’ share of the overall portfolio is still relatively small, according to Teruki Morinaga, director of insurance at Fitch Ratings Japan.

“Even for Dai-ichi Life, the allocation to alternative assets was just 6% as at end September 2023, and I maintain the view that the speed of increasing alternative investment by Japanese insurers will continue to be slow, given the limited opportunities in Japan and their still developing capabilities in investing in foreign alternative investments,” Morinaga told AsianInvestor.

RISK REDUCTION

The proportion of alternative investments will remain small in insurers’ investment books, Makimoto agreed. Yet there is merit to diversifying into the asset class.

“With these investments, insurers are diversifying their interest rate and public equity risks while pursuing higher yields driven by additional illiquidity premium,” Makimoto said.

Dai-ichi Life is indeed allocating capital to alternative investments for risk reduction, Kazuyuki Shigemoto, chief general manager of investment at Dai-ichi Life, told local media earlier in May.

While yields on Japanese government debt are too low, foreign bonds also have too much currency risk. And the company is cutting its holdings of domestic equities, which are surging, to avoid too much exposure to the asset class.

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As a result, :”Dai-ichi Life will target alternative investments, including hedge funds, for risk reduction. Private debt investments will be included from the current fiscal year that started April 1.

“We have to be cautious and carefully examine risks,” Tetsuya Kikuta, CEO at Dai-ichi Life, told the media in April. “But we have to shift a certain amount to assets like private credit, private equity, infrastructure, and real estate.”

VC FOR IMPACT

Dai-ichi has already announced several alternative investments in 2024.

In January, Dai-ichi Life Insurance announced a $50-million investment in Prologis Targeted US Logistics Holdings, a sector-specific US logistics fund managed by Prologis, marking the first time it has invested in an overseas sector-specific fund.

Investing in overseas real estate funds since fiscal 2017, Dai-ichi has focused its investments on diversified US and European funds, while at the same time evolving its investment strategies and investment schemes.

Another element of alternative investments has been smaller VC allocations, with the purpose of impact aligned with environmental, social, and governance (ESG) frameworks.

In April, Dai-ichi Life invested ¥100 million ($682,000) in Typica Holdings, Inc., a Japanese start-up that operates an online platform enabling coffee producers and coffee roasters to engage in direct trade.

In March, the insurer also announced two impact investments. The first was a $5-million investment in Rakuten Medical, Inc., a US biotechnology start-up that develops and markets pharmaceuticals and medical devices used in Alluminox treatment (photoimmunotherapy), a type of cancer treatment.

The second investment consisted of ¥100 million ($682,000) in Instalimb Inc., a Japanese start-up that develops, produces, and sells 3D-printed prosthetic limbs, as well as related equipment and materials, in developing countries.