Why Dai-ichi Life is paring equities and adding bonds

While most big Japanese insurers are maintaining their allocation to domestic stocks, Dai-ichi Life has said that it will slash its interest rate and equity risk by 20% by March 2024.
Why Dai-ichi Life is paring equities and adding bonds

Going against a trend among its peers, Dai-ichi Life is looking to reduce interest rate and equity risk in its portfolio as the large listed Japanese insurer is in an effort to strengthen its capital position. It is set to rely more on alternative investment exposure to generate yield.

The firm, which has some ¥37.7 trillion ($361.4 billion) in investment assets, is reducing its domestic equity exposure and increasing its holdings of yen-denominated corporate and government bonds with a view to cutting its interest rate and equity risk by 20% by the end of March 2024, a company spokeswoman told AsianInvestor. This is in line with its financial risk mitigation plan released in March, she added

Moreover, given that Japanese stocks have rebounded strongly since the Covid market crash in March and are up around 14% this year, Dai-Ichi is set to be taking some profits.

As of September the firm's domestic stock allocation was 8.5%. That's in line with the nine major life insurers, whose average exposure to domestic equities was about 9% at the same date, according to Fitch Ratings.


Source: Dai-ichi Life

However, Dai-Ichi Life seems to be bucking a trend among its peers.

Most insurers in Japan are maintaining their equity exposure or reducing it marginally, Teruki Morinaga, director of insurance for Japan at Fitch Ratings, told AsianInvestor. And they are unlikely to make any substantial changes over the next year, he added, as Japanese equities generate returns of about 2% and in some cases more than 3%, while domestic bonds often yield close to zero.

Moreover, Japanese insurers in general have accumulated robust capital levels, so they have enough buffer to absorb volatility shocks in the market, said Morinaga.

But Dai-ichi Life is the only listed firm of the country's four biggest insurers and is under pressure from its equity investors either to pay more dividends or buy back shares, he added, hence the need to strengthen its capital position.

Its current risk profile has about 70% coming from investments and about 30% from its underwriting business. That is why it is trying to reduce investment risks and increase the underwriting business mainly in North America, he added.

While Dai-ichi Life intends to sell domestic equities for risk control purposes, it will look to invest in stocks in industries with competitiveness and growth potential, it said as it released its financial results in mid-November. As for foreign equities, the firm said it would flexibly control such exposure.

The firm also said it would add policy reserve-matching domestic bonds better to match its asset and liability durations and would adjust the amount of currency-hedged foreign bonds, taking into account the interest rate differential between the yen and other currencies.


Reducing risk is also likely to dampen returns, so Dai-Ichi Life is keen to increase its overseas alternative exposure to raise its yield. But that comes with its own challenges.

“We are boosting alternative investments within the risk mitigation plan to increase investment return amid the low rate environment,” the spokeswoman said. "We mainly plan to invest in buyout funds and infrastructure funds and also selectively invest in foreign real estate via funds of funds."

The company will try to increase its property rental income and will invest in infrastructure-related assets, according to its mid-November financial report.

Most Japanese insurers are planning to increase their alternative investment exposure, but Fitch expects such allocations will only increase by a small margin in the near future. Their alternative investment allocations are relatively small – around 1% to 3%, Fitch estimates ​– and they can’t increase them radically, Morinaga said. 

Domestic alternative investment opportunities are limited, he added, and while Japanese insurers are seeking such assets overseas, ramping up alternatives is also a trend among US and European insurers, and higher demand tends to dampen yields.

The broad trend across all types of institutional investors, both in Asia and globally, is to build their exposure to alternatives and particularly privatet markets. Asset owners across Asia could double their alternative assets by 2024 as they reassess their strategic asset allocations in light of the economic and financial risks associated with the Covid-19 pandemic, found a study released in November by financial technology company Broadridge. 

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