KKR, Apollo Tap $5.8 Trillion in Japan Life Insurance for Assets #JapanFinance
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(Bloomberg Markets) — Wall Street is mining a new treasure trove of assets: The savings built up in Japanese life insurance. Companies controlled by KKR & Co., Apollo Global Management Inc. and other giant investors are doing deals to manage billions of dollars backing life and annuity policies. In an arrangement known as reinsurance, the Japanese insurers are reducing their risk by transferring some of their liabilities for future benefits to the money managers’ insurance units.
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The original insurers remain responsible for managing and paying the policies. But in return for helping to shoulder the financial obligation, the money managers receive a chunk of assets from the insurers. They’re betting they can invest that cash to generate more than what they’ll ultimately have to pay out to support retirement and death benefits under the policies. Much of the money is flowing into the hot investment of the moment: higher-yielding private credit.
Japan, which has Asia’s second-largest economy and a population of more than 124 million, is one of the world’s biggest insurance markets, with about $5.8 trillion in individual life insurance and annuity policies in force at the end of 2023, according to the Life Insurance Association of Japan. KKR estimates that about $3 trillion of the market in Japan could be reinsured, but only about 1% of that amount currently is.
Apollo, KKR and the like are best known as private equity firms, but these days they run huge credit businesses. Apollo’s Athene Holding Ltd. and KKR’s Global Atlantic Financial Group Ltd. have been doing reinsurance deals in the US for years. Japan is an attractive source of new assets, as the US insurance market has become more crowded and competitive. When PE-linked reinsurers take on a block of life insurance policies, they get the underlying assets—mostly investment-grade bonds and other debt—then typically sell them and reinvest the funds. A large portion, usually 40% to 60% of the money, goes into private credit investments the affiliated PE firm offers, which can include direct loans to companies, trade finance, credit card receivables and other debt. The rest usually goes into publicly traded bonds and similar investments.
Some observers worry about risks building up in private credit markets, but the money managers say they’re helping to bring better opportunities to Japanese savers. Life insurers who ink these deals can free up capital to sell new policies or offer new products with higher returns, says Matthew Michelini, head of Apollo’s Asia-Pacific business. “Reinsurance is just a tool,” he says. “The opportunity is bringing safe yield to Japan.”
The country is experiencing inflation for the first time in two decades. Japanese households, long the world’s top savers, have socked away more than $7 trillion in cash and deposits. The government has tried to push them to shift money into investments, but for years it was a losing proposition. Cash was a safe bet when prices weren’t rising and in many years even fell. Now, cash’s value is eroding. That decline could make life insurance with investment features or annuity products with guaranteed future payouts more attractive to consumers. “The largest opportunity is insurance,” Michelini says of Apollo’s Japan business. The company raised $35 billion in Asia from 2022 through 2024, with the largest proportion coming from Japan.
Private markets investors are eager to use reinsurance deals to soak up Japanese savers’ assets because the money is what’s called permanent capital—that is, clients can’t withdraw it—and the firms can use it for less-liquid investments. Insurers can also use reinsurance to get older liabilities off their books. “There’s a push on one side and a pull on the other side,” says John Morley, who heads insurance broker Aon Plc’s Asia Pacific strategy and technology group.
In the past year, top executives from investment firms have flown to Japan and expressed their eagerness to work with local insurers. In October, Canadian investment giant Brookfield hired a head of Japan reinsurance. KKR has raised about $11 billion in Asia through reinsurance deals, including $5 billion in Japan, says Manu Sareen, co-president of its Global Atlantic Financial Group. The insurer has four employees in Tokyo tasked with bringing in assets and new insurance business. “It underscores how important we think the Japanese market is to our growth in the next five years,” Sareen says.
Blackstone Inc. Chief Executive Officer Stephen Schwarzman says the firm sees a “very substantial” opportunity to earn returns for Japanese insurers and policyholders. But he says the $1 trillion private-markets powerhouse prefers to work with insurers as a money manager instead of owning its own insurance company and “potentially competing with customers.”
Yuji Ogawa, a senior manager overseeing new business at Japan Post Insurance Co., says the company received an influx of meeting requests on reinsurance after it entered into its first reinsurance deal, with the Reinsurance Group of America Inc., which isn’t affiliated with any PE firm. Ogawa says Japan Post is evaluating potential deals but doesn’t necessarily need more reinsurance, because gradual interest rate increases will help improve the company’s profits and allow more business expansion even without such deals.
Regulatory scrutiny of PE-linked insurers is growing. Private credit investments tend to be illiquid. There are worries about the rapid growth of the funds and how their assets would perform during a severe economic downturn or some other unexpected event. A 2023 International Monetary Fund paper noted that PE-linked insurers in the US often have a larger portion of assets in hard-to-sell investments than do their industry peers. That could be a problem if the US insurers need to raise cash quickly to make payouts, forcing them to accept fire-sale prices for their assets. “As a policyholder, you’re not worse off, but the trend of this happening may increase risk for the whole market,” says Morningstar analyst Michael Makdad.
A senior official at Japan’s Financial Services Agency says a potential uptick in reinsurance deals could raise questions about liquidity as well as potential conflicts of interest between the insurers and the investment firms with which they’re working hand in hand. The financial regulator is keeping an eye on any issues that might arise, the official says.
But other pressures may spur even more deals. New capital and accounting rules coming into effect in 2025 for Japan’s insurers will require insurance companies to more accurately reflect the value of their assets. That requirement could push more insurers to consider entering into contracts to offload policies that were sold long before Japan entered its ultralow-interest-rate environment. “A lot of these contracts were written in the 1990s, which means the guaranteed rates were high,” says Bloomberg Intelligence insurance analyst Steven Lam. “So basically every year they’re losing money on those policies.”
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