Sompo Japan, Nipponkoa Looking for Growth beyond Traditional Assets

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Sompo Japan Insurance and Nipponkoa Insurance are already acting as one entity ahead of their merger in September. They’ve announced plans to invest “tens of billions of yen” in new areas such as energy, environment and infrastructure, mainly through private equity funds, company officials said.

The move reflects their desire to seek new revenue sources, as well as possible hedging against inflation as Japanese authorities drive an aggressive monetary and fiscal stimulus, they said in an interview with Reuters on Thursday.

The two firms form NKSJ Holdings, one of Japan’s top three casualty and property insurers. NKSJ Holdings had roughly 5 trillion yen [$49 billion] in assets at end-2013, with combined income of 40.4 billion yen [$396 million] for the Oct-Dec quarter.

The entity’s combined assets were 36 percent Japanese shares, 30.3 percent domestic bonds, 26 percent foreign securities, and 7.7 percent in fixed and other assets.

The investment managers told Reuters their interest in alternative investments comes at a time when they are more cautious about buying bonds and shares.

“We have been selling down Japanese stocks. But we have to consider whether we don’t need to have assets to hedge against inflation,” said Takeshi Ninomiya, manager of investment planning at the two firms.

The insurance group started investing in areas such as energy, infrastructure, mainly through private equity funds in the financial year beginning April.

“To sow the seeds for the future, we want to consider investments in growth areas, free from the existing investment framework, that are less affected by market fluctuations and have mid- to long-term growth potential,” said Takuro Nishida, deputy investment planning manager.

That intention could reflect an ambition to beat the current return on equity of 5.4 percent forecast for fiscal 2013.

In the more traditional portfolio investment area, the NKSJ investment managers said they were slightly more cautious about buying foreign-currency assets than the last financial year ended March, when they increased offshore holdings by “tens of billions of yen”.

In the last financial year, the yen weakened and Japanese share prices gained thanks to Prime Minister Shinzo Abe’s expansionary economic policy.

“There is a greater uncertainty, such as slowdown in China, or Ukraine, compared to last year, when Abenomics boosted asset prices. This financial year will be more difficult. Asset prices may rise on the whole, but with big waves,” said Nishida.

“So we will be more cautious than last financial year. We will continue to buy foreign assets but we don’t expect one-direction moves,” he said, adding that the insurer plans to buy foreign bonds and shares when the yen is strong but will also sell them when the yen is weak.

The NKSJ is also cautious on emerging markets, in part due to concerns over slowdown in China and the prospects of less expansive U.S. monetary policy.

“We’ve been in emerging markets since 2002. Since 2008, we have been buying emerging market bonds and shares that had a higher yield than in developed world. We feel it’s time to reap the benefits,” Nishida said.

On the whole, they expect both the global and Japanese economies to maintain moderate growth, and have no plan to increase their holding of domestic bonds.

“Yields are low and could rise as the economy recovers and as inflation rises. So there is no strong reason to load up on JGBs. Higher-yielding foreign bonds are more attractive.”

NKSJ Holdings, like its Japanese peers, has maintained very large holding of Japanese shares to strengthen ties with customers, but this practice has seen major volatility in its financial health.

Sompo Japan and Nipponkoa intend to continue reducing their share holdings, the investment planners said.

(Editing by Dominic Lau and Eric Meijer)