Dai-ichi Alternate Investments Strategy

Japan’s largest listed life insurer has a dilemma — its traditional investment strategies aren’t working. Yields on Japanese government debt are too low. Foreign bonds have too much currency risk. And the company is cutting its holdings of domestic equities, which are surging, to avoid too much exposure to the asset class.

Alternate Investments - As a consequence, Dai-ichi Life Holdings has begun to include more alternative investments in its ¥33.9 trillion ($219 billion) portfolio. The company is also looking at increasing mergers and acquisitions and will only start buying 30-year Japanese Government Bonds again once yields rise to 2%.

Insurers have long been major investors in super-long JGBs because they need to own investment assets that generate stable income for years to pay for insurance obligations often spanning decades.

Market expectations for insurers to ramp up JGB buying have gained momentum after the Bank of Japan terminated the negative interest policy last month. However, yields remained below what the company gauged to be sufficient for investment.

Given JGBs’ paltry returns, U.S. Treasuries and other foreign bonds used to be an attractive investment for insurers. That changed once the Fed started aggressively raising rates, which drove up hedging costs, more than wiping out the returns on the notes.

Japanese Stocks - Even the rally in Japanese stocks is causing Dai-ichi a headache. The company plans to cut its domestic equity holdings by ¥1.2 trillion over the next three years to reduce risks in its investment portfolio. The Topix index has gained 12.5% so far this year and the Nikkei 225 has risen to a record high. That’s undermining the company’s efforts to rebalance its portfolio.

Mergers & Acquisitions - Mergers and acquisitions is one area where Dai-ichi plans to allocate more resources. The insurer is hunting for acquisitions to expand overseas and add non-insurance businesses at home. The firm plans to spend ¥300 billion over the next three years for acquisitions. Japanese insurers and asset managers are primary overseas targets.

As part of its strategy, Dai-ichi agreed to buy Benefit One, a Japanese company that provides employee benefit programs, for $2 billion last month. The company has set up a mergers and acquisitions team to focus on a growing list of potential deals and is hiring outside talent.

Dai-ichi will aim for bigger acquisitions once it hits its capital efficiency goal during the current three-year plan that ends in March 2027.