Japanese insurers suffer from negative interest rates, strengthening their focus on alternative investment
Interim financial results of Japan’s top 9 life insurance companies including Japan Post Insurance reveals the ongoing expansion of their alternative investment including real estate.
Wednesday, 30 November 2016
Collected up to Nov. 24, the 2016 Interim Financial Result for Japan’s top 9 life insurance companies including Japan Post Insurance was being announced, indicating insurance companies’ asset management and revenue have fallen below last year. This is resulting mainly from the negative interests rates, which have been affecting the Japan’s institutional asset management.
Major life insurance companies, Nippon Life, Dai-ichi Life, Sumitomo Life and Meiji Yasuda Life declined about 10% – 30% on core profit, and 10% – 20% on insurance sales. This is because the negative interest rates harshly affected both asset management and insurance sales. This fact backs up the significant increase of new decisions to start creating the investment platforms for alternative assets and global real estate by Japanese life insurance companies in 2016. Japan Post Insurance, the largest Japanese insurance company (total assets : approx. 800 billion USD), as a great example – the announcement of its new division for alternative investment in September this year. (Article:https://japanplacementagent.com/en/article-2/the-largest-japanese-insurance-company-debuts-for-alternative-investment/ )
When we take a closer look at Japanese life insurance companies (41 companies) that form one of the most noteworthy groups of investors in Japan; even though they hold a total AUM of 347 trillion JPY (3.36 trillion USD) as of 2016 August, still only 1.7% is allocated to direct real estate investment according to the Life Insurance Association of Japan.
Although Japanese life insurance companies need to generate 2% return for its assumed interest rate, the interest rate on 10-year Japanese government bonds reached at minus 0.3% (July 2016).
Investment return for overall Japanese insurance company was 1.92% in 2015, and 2.58% in 2014. Although the number for 2016 is not disclosed yet, it is estimated that the number for 2016 would be much lower than 2015. Therefore, diversifying their investment asset classes as alternative ways from them to gain higher returns.
In this environment, many life insurance companies start reassessing real estate and its higher return, typical characteristics of long-term, income growth, and inflation hedging abilities. Many major life insurance companies decided to step further into investment in alternative assets and real estate in 2016. Their investments in alternative assets and real estate are expected to accelerate in early 2017 or in the new fiscal year of 2017 starting in April.
Even if Japanese life insurance companies reallocate only 1% to global real estate, 3.4 trillion JPY will still enter into the global real estate market. That is, equivalent to the estimated investment size of Japan’s ‘big four’ public pension funds. This gives a high expectation for a significant change and other large Japanese investors, such as other insurance groups, major banks, regional banks, and credit unions, are expected to follow along.
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