Japanese insurers are playing with fire

Ian Brimecome, the most senior foreigner in the Japanese insurance industry, calls time on peers’ reckless foreign forays.

Hired hand turned inside man, Ian Brimecome has seen what happens when Japanese insurance companies start making risky investments: bankruptcies.

As an M&A banker in the 1990s he advised on numerous takeovers of failed Japanese insurers. Each went under as a result of investments made to offset negative spreads, the gap between income and returns on guaranteed insurance policies.

He is feeling a case of déjà vu coming on.

“There is a lot more aggression out there, which last time brought me a lot of attractive M&A fees when I spent my time rescuing the people who had gone too far,” Brimecome told FinanceAsia.

The 63 year-old sits in the upper echelons of Tokio Marine Holdings, Japan’s largest property & casualty insurer by revenue. As a loftily titled senior managing executive officer (he’s one of four in the firm), Brimecome is tasked with overseeing its European business and international business strategies.

What the silver-haired, London-based veteran sees across the insurance industry leaves him worried. “The issue is a more indiscriminate chase for yield.”

Once again Japan’s insurers are venturing into foreign financial instruments ranging from fixed income private placements to equities with high dividends and collateralised loan obligations.

The industry’s forage for higher returns became frenzied when yields on domestic government bonds tumbled into negative territory after the Bank of Japan shocked the market with record dollops of quantitative easing and cut its deposit rate in January to -0.1% for the first time in its history.

Life insurers’ exposure to foreign securities stood at ¥77.53 trillion ($699.47 billion), or 21.7% of their portfolios, by the end of August. That compared to ¥45,27 trillion, or 14.2%, in 2011, according to the Life Insurance Association of Japan.

Japanese insurers have also turbocharged asset diversification by buying foreign peers. In October Sompo agreed to buy US insurer Endurance Specialty for $6.3 billion; Mitsui Sumitomo Insurance completed the acquitision of British reinsurer Amlin for $5.3 billion on February 2; and Meiji Yasuda Life Insurance wrapped up a $5 billion puchase of StanCorp Financial on March 7.

Financial sources in Tokyo say the Financial Services Agency, Japan’s powerful regulator, is worried some of Tokio Marine’s peers may struggle to manage these new insurance subsidiaries and is starting to apply the brake on further deal making. 

Brimecome's warning

Outbound investing
Tokio Marine has not stood apart from this offshore investing obsession. In fact, Brimecome has led a series of high-profile multi-billion dollar acquisitions for Tokio Marine in recent years.

In 2008 the insurer snapped up the UK’s Kiln for $899 million and then Philadelphia Consolidated for $4.7 billion the same year. It bought Delphi Financial Group in 2012 for $2.7 billion and in 2015 it made the biggest ever purchase by a Japanese insurance company when it acquired Houston-based HCC for $7.5 billion.

As a result of this buying spree, Tokio Marine is set to generate 43% of its earnings overseas this year.

To minimise risks of a blow-up, the insurer employs foreigners to manage overseas assets and is determind to become a more cosmopolitan comapny. It made Delphi’s president Don Sherman an executive officer and co-chief investment officer globally effective August 1.

“I’m not the only foreigner in Tokio Marine senior management any more,” said UK-born Brimecome, who was the company’s first foreign-born executive officer. “It was sort of a lonelyish place for a while.”

Like its peers, Tokio Marine is next plotting to increase its ¥4.5 trillion worth of holdings in foreign securities. It mainly intends to do so by buying bonds in the US and Europe via domestic subsidiaries as well as expanding assets at the companies it has bought.

As a result of the rapid geographic diversification the insurer has managed to keep the yield on its ¥21.8 trillion ($197 billion) of assets under management at around 2.2%.

In Part Two, Brimecome reveals more ways to avoid M&A pitfalls.

¬ Haymarket Media Limited. All rights reserved.
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