Japanese life insurers expected to form more ties with private credit aspects

Japanese life insurers seeking diversification are forming partnerships with external investment managers and increasing their private credit holdings, a trend analysts expect will continue.

Illustrating this trend, Nippon Life Insurance Co. signed a memorandum of understanding for a strategic partnership with Blackstone Inc. to provide investment management services in the private credit and real estate sectors. Nippon Life anticipates allocating approximately ¥1.5 trillion in new capital to Blackstone for deployment in private credit and structured credit strategies over the next five years.

Japan Post Insurance Co. Ltd., KKR & Co. Inc. and KKR subsidiary Global Atlantic Financial Group Ltd. entered into a strategic partnership that enables the Japanese life insurer to access Global Atlantic's platform to support its growth and diversify its business portfolio into overseas markets.

Nippon Life's competitors are likely to enter similar deals, but selectively rather than uniformly, Marcos Alvarez, managing director of global financial institution ratings at Morningstar DBRS, told S&P Global Market Intelligence in an email. Alvarez expects large Japanese life insurers to pursue strategic partnerships with global asset managers, especially when such collaborations provide access to private credit origination, structured credit, reinsurance capabilities and investment expertise.

"Japanese life insurers are using partnerships to gain private-market access and expertise, rather than merely purchasing fund exposure," Alvarez said.

On the flip side, Japanese assets are also desirable for investors.

External asset managers see forming partnerships with Japanese life insurers as a practical way to access Japan's large pool of insurance assets, Koichi Niwa, an analyst at UBS Securities Japan, said in an email to Market Intelligence.

"I believe Japanese life insurers' investment capital itself is highly attractive to private asset managers, which could continue to drive similar partnership opportunities," Niwa added.

S&P Global Ratings believes that Nippon Life "properly controls and monitors risks," in line with its enterprise risk management framework, according to a July 13 report.

Nippon Life has a sufficiently diversified investment portfolio, which Ratings views as a risk-mitigating factor. The insurer implements "appropriate limit management of foreign exchange fluctuation risk and investees' concentration risk," according to Ratings. Additionally, with Nippon Life's focus on relatively simple insurance products, Ratings does not believe that there are factors that would significantly increase the volatility of the insurer's capital and earnings.

Private credit allocations

Japanese life insurers are expected to raise allocations to private credit through partnerships.

Niwa believes that private credit will remain an important asset class for Japanese life insurers, adding that while there may be periods of volatility and changing market sentiment, private assets as a whole are still in the relatively early stages of development from a long-term institutional investment perspective.

"Therefore, I expect Japanese life insurers to continue increasing their allocations over time and to view private credit as an increasingly important component of their investment portfolios," Niwa said.

Amid rising domestic interest rates, Japan's major life insurers are replacing low-yield bonds with high-yield ones, Ratings said in a June report. The rating agency also noted that unrealized gains from stock holdings have outpaced unrealized losses on bonds, "so market skepticism on this has been subdued." Additionally, while insurers are scaling back or leveling their domestic equity holdings, they are gradually expanding their allocations to alternative assets, Ratings observed.

Nippon Life and Blackstone did not respond to a request for comment.