Japan's biggest insurer weighs riskier overseas CLO investments

Japan Times

14-05-2025

Japan's biggest life insurer is considering taking on a little more risk with its investments in collateralized loan obligations (CLOs), as it looks for ways to eke out better returns abroad.
Nippon Life Insurance last year joined other Japanese institutions that are buying CLOs — financial products made up of leveraged corporate loans — to diversify investments. They have typically focused on the highest-rated notes, which are seen as the least risky but offer lower returns.
"There could be a situation where we cannot secure enough spreads with the triple A-rated tranche,' Nippon Life Chief Investment Officer Keisuke Kawasaki said in an interview. "If that happens, we're thinking about enhancing the yields by including some double A-rated ones.'
CLOs are attractive to Japanese investors such as Nippon Life and Norinchukin Bank because their interest payments move in line with fluctuations in benchmark rates. Such floating-rate products can absorb the costs of hedging against currency risk better than foreign bonds.
With most insurance payouts denominated in yen, Japanese insurers hedge part of their foreign-currency investments against exchange-rate swings. But they were forced to sell hedged foreign bonds after protection costs surged in 2022, when the Federal Reserve launched aggressive rate hikes.
Nippon Life has ¥78 trillion ($527 billion) in its general account of investments that it manages to meet obligations for policyholders and other clients. At the end of March, foreign bonds accounted for about 10% of the portfolio and half of them were with currency hedging.
The company doesn't disclose the amount of its CLO holdings. Kawasaki said other floating-rate products it has include infrastructure and real estate debt.
It's a tricky time for Japanese insurers to invest, with U.S. President Donald Trump's trade war fueling global market volatility and reducing the appeal of Treasurys. At home, yields have climbed as the Bank of Japan raises interest rates to normalize monetary policy. More recently, super-long Japanese government bonds (JGBs) have been sold off, pushing yields on the 30-year note to the highest since 2000.
In a twice-a-year asset allocation briefing last month, Nippon Life said it plans to reduce its holdings of the nation's sovereign bonds. Kawasaki clarified its stance to say that current yields are "attractive.'
Nippon Life has been replacing lower-yielding JGBs with higher-yielding notes since last year, given rising domestic rates. The insurer has said it sold about ¥2 trillion worth of domestic bonds in the year ended in March, booking a loss of ¥320 billion in the process.
Kawasaki said Nippon Life is looking for investment beyond Treasurys, such as sovereign bonds in Europe and Australia.
"We want to seek opportunities in various places,' he said. "We've been diversifying, and I have a fresh appreciation of the importance of that in this highly uncertain environment.'