Japanese life insurers divided on equities exposure
Japanese life insurers are split on the attractiveness of equities in the current macroeconomic environment. Some of them are increasing their exposure, while others remain wary and favour private markets instead.
While long-term fixed income, and especially Japanese government bonds (JGBs), is the main target for investments and takes up the majority of life insurers’ portfolios, relatively smaller pockets are seeking to diversify to riskier assets with the aim of boosting returns.
“I have observed that some major or medium-sized Japanese life insurers are expected to maintain their exposure to domestic equities,” Teruki Morinaga, director of insurance at Fitch Ratings Japan, told AsianInvestor.
These life insurers do so because Japanese equities provide high dividend yields — often well above 2% — which means higher yields than JGBs. Furthermore, some life insurers believe that the exposure to domestic equities will support their diversification efforts, Morinaga explained.
“These Japanese lifers — often mutual companies — tend to have ample excess capital to absorb higher capital charge and market volatility risks,” he said.
One example of this trend is Asahi Mutual Life Insurance. As of the fiscal year ending March 31, domestic equities made up 11% of total assets, an increase from 9.7% a year earlier.
This increase is noteworthy, given that the lion’s share of Asahi Mutual’s portfolio, 61.8%, was invested in fixed income by end-March, down from 63% a year prior due to decreased investments in overseas fixed income.
CUTTING BACK
Contrary to Asahi Mutual, Dai-ichi Life is looking to cut its holdings of domestic equities — which have been surging in value — in order to avoid too much exposure to the asset class, Tetsuya Kikuta, CEO of Dai-ichi Holdings, told local media in April as the new fiscal year in Japan took off.
The subsidiary, Dai-ichi Life Insurance, owns Japanese equities worth roughly ¥4 trillion ($25.4 billion). The plan is to sell ¥1.2 trillion worth over the next three years, up from the ¥600 billion sold under its previous medium-term plan.
“Our capital costs are still high, so we need to lower those costs and improve capital efficiency. It's essential to mitigate risks in conjunction with efforts to increase profit. From that perspective, we'll reduce domestic equities, which is the largest source of volatility,” Kazuyuki Shigemoto, managing executive officer at Dai-ichi Life Insurance, told local media in May.
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Instead, Dai-ichi Life, Japan’s largest listed life insurer, plans to direct funds to alternative investments.
“We're shifting to private equity, hedge funds and similar targets. We're willing to start on private debt from this fiscal year,” Shigemoto added.
MORE ALTERNATIVES
At Nippon Life Insurance, Japan’s largest life insurer, the expectation is that prices in the domestic equity market will fall in this fiscal year, following the previous year’s rally when the Nikkei 225 index reached a new all-time high.
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Nippon Life invested around ¥350 billion in domestic equities in the last fiscal year, mainly in group subsidiaries, according to Keisuke Kawasaki, executive officer and chief investment officer at Nippon Life Insurance.
“We expect it to be roughly the same this fiscal year. Similarly, foreign stocks will also stay on par with last year. For both, we'll choose our targets based on growth potential, shareholder returns, and sustainability,” Kawasaki told local media in May.
Meanwhile, Nippon Life is following Dai-Ichi Life into alternative investments this fiscal year. Nippon Life will target foreign real estate and infrastructure assets, AsianInvestor understands.
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Another insurer, Meiji Yasuda Life, plans to invest about ¥600 billion in domestic and overseas alternative investments over the next three years. The goal is expansion and diversification beyond government bonds and stocks, with the ambition to raise returns.
"We will actively invest in long-term assets that are compatible with life insurance, focusing on private equity and private debt," Hideki Nagashima, president at Meiji Yasuda Life, told local media in January.