October 26, 2018 / 8:12 AM / 10 months ago

UPDATE 1-Sumitomo Life to diversify assets amid rising dollar costs

* Rising dollar hedging costs make Treasuries less appealing

* Yields on JGB remain too low to be bought in quantities

* Hunt for yields in U.S., European corporate bonds (Updates with comments, details)

By Taiga Uranaka

TOKYO, Oct 26 (Reuters) - Sumitomo Life plans to diversify its foreign-currency denominated assets in response to rising costs to hedge the U.S. dollar, highlighting Japanese insurers’ challenges amplified by monetary policy moves at home and overseas.

The company has not bought U.S. Treasuries in the first half, which ended in September, and is not planning to do so

either in the current half, Toshio Fujimura, head of investment planning department, Sumitomo Life Insurance, said at a media briefing on its investment strategy.

“At the moment, we cannot secure returns from 10-year Treasury notes after hedging costs,” he said.

Japanese insurers typically hedge a bulk of their investment in foreign-currency denominated assets against the swings of the currency rates, since most of their insurance payout obligations are in the Japanese currency.

Three-month U.S dollar hedging costs are about 300 basis points lately, up from 200 basis points the previous year. A basis point is one hundredth of a percent. Yields on 10-year Treasury yields hover around 3 percent.

It compounds challenges for Japanese insurers, who have recently been shifting their investment focus overseas.

Japanese life insurers, which manage a combined $3.21 trillion in assets, were among the biggest buyers of Japanese government bonds (JGBs) before the Bank of Japan’s aggressive monetary easing drove down their yields sharply.

Yields on 20-year and 30-year JGBs , tenors of choice for life insurers, have fallen below 1 percent.

Sumitomo Life, Japan’s fourth-largest private sector life insurer, said it would continue to curb investment in super-long JGBs given their low yields. The insurer manages about 31 trillion yen ($276 billion) in assets.

At the end of March 2013, shortly before the BOJ stimulus measures, JGBs and other domestic bonds accounted for 50.9 percent of Sumitomo Life’s portfolio, while foreign-currency denominated assets made up for 15.8 percent. Five years later, domestic bonds were at 42.7 percent, while the proportion of foreign-currency denominated assets have grown to 30.3 percent.

Given diminishing returns from Treasuries after hedging costs, Sumitomo Life said it plans to secure extra returns by investing in U.S. and European corporate bonds.

Corporate bonds have bigger risks of defaults than safer government debt, therefore, investors can earn credit spreads.

The insurer said it will also increase investment in euro-denominated assets.

Sumitomo Life plans to increase their investments in foreign bonds without currency hedges when the dollar falls sharply against the yen.

($1 = 112.3200 yen)

Reporting by Taiga Uranaka, Additional reporting by Yoshiko Mori, Editing by Chang-Ran Kim and Sherry Jacob-Phillips

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