Dai-ichi Life Adapts Investment Strategy Amid Low Yields and Market Challenges

Dai-ichi Life, Japan's largest life insurer, shifts investment strategy amid low yields, currency risks, and declining population. Expects unsolicited takeovers to become more common in Japan.

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Dai-ichi Life Adapts Investment Strategy Amid Low Yields and Market Challenges

Dai-ichi Life Adapts Investment Strategy Amid Low Yields and Market Challenges

Dai-ichi Life Holdings, Japan's largest listed life insurer, is facing challenges with its traditional investment strategies due to low yields on Japanese government debt, currency risks in foreign bonds, and efforts to reduce exposure to domestic equities. In response, the company is increasing investments in alternative assets such as private credit, private equity, infrastructure, and real estate.

Tetsuya Kikuta, CEO of Dai-ichi Life, said the company is also looking to expand through mergers and acquisitions, both overseas and in non-insurance businesses in Japan. However, Dai-ichi remains cautious and is carefully examining risks. The company will only start buying 30-year Japanese government bonds (JGBs) again once yields rise to 2%.

The recent rally in Japanese stocks has also posed challenges for Dai-ichi, undermining its efforts to rebalance its portfolio . Japan's life insurers are expected to increase their purchases of domestic sovereign bonds this year after the end of negative interest rates in the country. They are also likely to continue selling foreign debt that is hedged against the yen's appreciation due to the associated costs.

The Bank of Japan has removed the sub-zero interest rate and yield-curve control program, leading to a rise in the yield on 30-year sovereign securities favored by life insurance companies. In the past, insurers had held off on purchasing JGBs due to low yields and expensive hedging costs for foreign debt.

Why this matters: Dai-ichi Life's adaptation of its investment strategy reflects the broader challenges faced by Japan's life insurance industry amid low domestic yields and currency risks. The shift towards alternative assets and potential mergers and acquisitions could have significant implications for the industry's future growth and stability.

Kikuta also expects unsolicited takeovers to become more common in Japan, citing Dai-ichi's successful $2 billion bid for Benefit One despite the target company already having an agreed lower tender offer. He said the bid was driven by strategic necessity as demand for insurance stagnates due to Japan's declining population, and that the government's new takeover guidelines helped make the decision easier by removing the stigma around unsolicited bids.

According to Kikuta, executives at banks are also no longer hesitant to finance or advise on hostile acquisitions. He believes such unsolicited deals will become more common as they could push up deal valuations in Japan, as suitors have to consider the possibility of counter bids. This shift in attitude towards unsolicited takeovers could lead to increased M&A activity and potentially higher valuations in the Japanese market.

Key Takeaways

  • Dai-ichi Life shifting to alternative assets due to low yields on JGBs and currency risks.
  • Dai-ichi seeking mergers and acquisitions, both overseas and in non-insurance businesses in Japan.
  • Dai-ichi cautious, will only buy 30-year JGBs when yields reach 2%.
  • Japan life insurers expected to increase domestic bond purchases after end of negative rates.
  • Unsolicited takeovers becoming more common in Japan, driving higher deal valuations.