May 9, 2018 / 8:44 AM / 16 days ago

Sompo Japan to increase overseas credit investment in 2018/19

* Plans to cut U.S. Treasury holdings amid soaring hedging costs

* Ready to lock in profits if dollar rises to around 115 yen

* Plans to diversify investment-grade corp bonds into Europe

* To reduce holdings of Japanese stocks by 100 billion yen

By Tomo Uetake and Yoshiko Mori

TOKYO, May 9 (Reuters) - Sompo Japan Nipponkoa Insurance Inc will start investing in European corporate bonds, along with U.S. credits, to make up for lean domestic bond returns, senior company officials said on Wednesday.

The property-casualty insurer, which is a core unit of Sompo Holdings Inc, said it plans to reduce holdings of U.S Treasuries with currency hedging, citing that higher costs of dollar-hedging has undercut their actual returns.

The three-month hedging cost stands at 0.70 yen per dollar or about an annualised 2.6 percent. That means buying 10-year U.S. Treasuries yielding 3.0 percent with currency hedging leaves Japanese investors with a meagre return of 0.4 percent.

“On a currency-hedged basis, European bonds look more attractive than the U.S. debt,” said Hidetoshi Kurachi, manager in charge of investment planning at Sompo Japan Nipponkoa Insurance, in an interview with Reuters.

“Within the corporate bond space, we opt not to take higher risks as we think it’s already late in the credit cycle,” he said, adding that the insurer is buying only investment-grade.

He also said the company may buy U.S. Treasuries without currency hedging when the dollar falls to 105 yen-106 yen.

As Sompo Japan expects the dollar to be in a range of 111 yen to 115 yen, at the end of the current financial year in March 2019, it is likely to sell the dollar around 115 yen to lock in gains, he added.

Japanese insurers have been under pressure to enhance yields as they face diminishing returns from Japanese government bonds(JGBs), a traditional choice as a safe-haven asset, after the Bank of Japan’s massive monetary easing and negative interest-rate policies.

Sompo Japan, with about 7 trillion yen ($64 billion) of assets under its management, said it plans to gradually cut holdings of emerging market bonds this financial year.

“Emerging market debt boosted our returns in the last financial year. We think it’s time to brace for a possible comeback of volatility,” Kurachi added.

The company plans to cut its domestic stock holdings by about 100 billion yen, in a continued effort to unwind cross-shareholding with corporate clients.

Sompo Japan said JGBs are not really attractive unless the yields of 20-year or 30-year JGBs rise close to 1.0 percent. They stood at 0.525 percent and 0.735 percent respectively on Wednesday.

Given the continuing low-interest rate environment, the insurer keeps diversifying its investment portfolio to secure stable income.

The company also plans to increase its investments in infrastructure and real estate in developed countries.

$1 = 109.50 yen Reporting By Tomo Uetake, Editing by Sherry Jacob-Phillips

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