Dai-ichi Life Insurance Co. has reported a significant financial setback, incurring a loss of approximately ¥140 billion ($890 million) after selling off a substantial portion of its long-maturity bond holdings. This strategic decision was made to better position the company in anticipation of rising interest rates.
The insurer offloaded around ¥500 billion worth of Japanese government bonds, particularly focusing on 20- to 40-year notes, during the fiscal first half that ended in September. The company’s president, Toshiaki Sumino, explained that these sales were predominantly carried out in the first half of the fiscal year and hinted at a more cautious approach in the second half.
“We will continue to carry out replacement operations while paying attention to the impact on profits and losses in the next fiscal year and beyond,” Sumino stated. Despite the notable loss, he reassured stakeholders that the company’s financial stability remains intact. Dai-ichi Life currently holds ¥18.9 trillion in yen-denominated bonds.
The move comes as part of a broader strategy to prepare for an expected rise in interest rates. Sumino anticipates that the Bank of Japan (BOJ) will increase rates this month, attributing this to signs of economic recovery within the country. The BOJ, under Governor Kazuo Ueda, kept rates steady in December, awaiting further clarity on the economic policies of U.S. President-elect Donald Trump, who is set to assume office later this month.
Globally, bond yields have been trending upward, driven by the resilient performance of the U.S. economy. Strong economic indicators such as low unemployment claims, robust corporate bond sales, and rising oil prices have heightened expectations of economic strength. This in turn could delay additional interest rate hikes by the Federal Reserve.
The U.S. 10-year Treasury yields, a key benchmark, saw a notable increase of 40 basis points in December, reaching 4.569%, after a period of decline throughout much of 2024. This upward trajectory has continued into the new year, with yields now at 4.626%.
“It’s hard to say that interest rates have hit their ceiling at the current level, so it’s likely that realized losses on bonds due to rising interest rates will continue in the future,” noted Tomoichiro Kubota, a senior market analyst at Matsui Securities Co.
Sumino, who previously worked in the U.S. during Trump’s first term, acknowledged the complex implications of the incoming administration on global financial markets. He expressed concerns about the widening gap between strong and struggling companies, as some major Japanese firms are beginning to report significant profit declines.
On the subject of inflation, Sumino conveyed skepticism about maintaining a 2% rate, suggesting a potential ceiling of 2.5% for 30-year bonds and 1.5% for 10-year bonds.
Since taking office in April 2023, Sumino has been focused on revitalizing Dai-ichi Life’s operations, especially in the wake of a scandal involving a former sales employee in 2020. This has included efforts to boost sales, with annualized premiums from new contracts reaching 55.9 billion yen in the first half of fiscal 2024. This figure is 2.5 times higher than the same period in the previous year, marking the highest level since the first half of 2016.
“Dai-ichi Life likely wanted to limit the size of unrealized losses it would report in the future, and given upside to its earnings guidance from other factors such as gains on sales of equities, it had space to recognize large losses while still being likely to beat its initial earnings guidance for the full year,” explained Michael Makdad, a senior analyst at Morningstar Inc. “The rebalancing means the company recognizes a large loss now but earns a higher investment yield in future years.”
As Dai-ichi Life navigates the challenges posed by shifting economic conditions, its strategy reflects a cautious yet forward-looking approach. The company’s decision to reallocate its bond holdings in light of anticipated interest rate hikes underscores its commitment to maintaining long-term financial health and profitability.
