Growth has never been the issue for ORIX Life Insurance Corporation. Over 30 years ago, in line with ORIX Group's strategic commitment to expand its presence in the retail finance sector, ORIX Life began selling life insurance policies through ORIX Group’s corporate financial services salesforce. Since then, it has successfully diversified its product portfolio to include offerings including medical, cancer, and U.S. dollar-denominated whole life insurance etc.
Today, ORIX Life has almost 5 million policies in force and sells about 300,000 to 400,000 new ones each year through a variety of in-person and online sales channels. The company’s solvency margin and AA- credit ratings are both healthy and customer feedback is overwhelmingly positive.
Profitability was another matter. When it came to investing all those premiums it was collecting, ORIX Life adopted a traditional Japanese local bank stance, investing two-fifths of its assets under management in cash and two-fifths locally in Japan.
With returns on cash effectively negative at a time of near-zero interest rates, the return on the entire portfolio was little better than breakeven – significantly less than the 3% or more being promised to policyholders. A second issue was the potentially problematic mismatch between the very long-term nature of the life policy liabilities and the fact that a big chunk of assets was being held in short-term cash.
New broom, new strategy
Those were the challenges awaiting Shintaro Yoshida when he took over as Chief Investment Officer at ORIX Life Insurance in 2018, flush with experience of working in London and at top global insurers including American International Group (before the global financial crisis) and MetLife. “I had been in a wider capital management role at MetLife,” he says “and I wanted to get back to investing, which I find more exciting. But I knew that we would have to change strategy completely.”
One important reason for that was an upcoming revision in capital requirements set by the Financial Services Agency, Japan’s top financial regulator. The new rules, due to come into force in 2025, demand that life insurers set aside extra capital for any asset-liability mismatch. As Mr. Yoshida realized as soon as he arrived, this risked further depressing the company’s return on equity – which was already a drag on ORIX’s groupwide performance.
His first task, therefore, was to reduce that mismatch, in order to manage the portfolio’s interest rate risk and stabilize the economic capital committed to the business. The obvious solution was to shift cash into longer-dated JGBs but the potential obstacle to such a move is that as and when interest rates rise, the bonds would fall in price, necessitating a damaging write-down.
However, Mr. Yoshida was also aware of an accounting adjustment available to Japanese life insurers that means they do not have to mark their long-term assets to market as long as these are matched with equally lengthy liabilities. Once he introduced use of this accounting treatment at ORIX Life, as well as starting an interest rate hedging program, the way was clear to switching cash into government bonds.
Diversification through innovation
Having secured the capital position, he turned his attention to improving profitability. Most significantly, he built a new team to invest in alternative assets, including private equity and debt, real estate and infrastructure assets. The rationale was that given the ‘stickiness’ of life insurance premiums (in other words a high likelihood that customers would keep paying their premiums), the company could afford to take liquidity risk to raise returns.
Today, the alternative investment team in Tokyo is 17-strong and oversees allocations to around 100 separate funds, dealing with sourcing, risk management and back-office processing. A high single-digit figure of total AUM is now invested in alternatives, more than at other domestic life insurers – though some peers are starting to explore this asset class.
The second strand to increasing profits was to raise the allocation to global credit (in other words, international corporate bonds). Again, Mr. Yoshida felt that ORIX Life’s ability to buy and hold such bonds for the long term meant it could take more credit risk by eschewing the AAA-rated bonds typically favored by Japanese life insurers to higher-yielding issues all the way down to BBB.
Running a global portfolio that is heavily weighted to the US proved difficult to do from Tokyo, so ORIX Life asked Robeco, the Dutch asset manager that is also part of ORIX Group, to oversee it on its behalf. Robeco is a successful asset manager with a 90 year history and provides a research-driven approach to invest in global corporate bonds.
Taking on a ‘buy & manage’ portfolio, with low turnover and where each sales decision has to be carefully weighed required a new approach, but close cooperation with Robeco and colleagues in Japan has helped to expand the investment field of ORIX Life.
Rising returns, bright future
Five years on, the new strategy is delivering. ORIX Life’s total AUM has jumped from ¥1.3 trillion (roughly $10 billion using a normalized ¥130/$ exchange rate) in 2018 to ¥2.4 trillion ($18 billion) today. The growth has been driven by new cash inflows from business growth as well as a steady increase in the value of the managed assets. Overall portfolio returns have risen more than 50bps, with the alternatives and global credit portions making a healthy contribution.
Part of this outstanding performance is the result of good timing. Mr. Yoshida started reallocating the company’s AUM just as COVID-19 spread and asset prices globally took a sharp hit, allowing him to buy the new asset classes at good valuations and even allowing him to get into funds that are usually closed to new investors. That meant returns were positive from day one.
But much credit also goes to the alternatives team and its skilled fund selection, which has helped it build a solid reputation. This has been amplified by the ORIX brand, with the wider group being a pioneer investor in renewables and environmental infrastructure, first in Japan and then internationally. “This meant people already knew us when we started to visit funds and asset managers,” says Mr. Yoshida. “And today, with $500m a year of cash to invest, the funds come to visit us, which is a big change.”
As those growing cash flows are invested according to the new strategy, the portfolio’s – and hence the business’s – return on capital should continue to rise. There are always risks, of course, but ORIX Life can arbitrage widening or shrinking disparities between Japan’s growth rate and that of the global economy by shifting investments between domestic and international as needed.
And while Japanese interest rates will (inevitably) rise at some point, causing a hit to the JGB portion of the portfolio, Mr. Yoshida points out that this will be more than offset by a reduction in the company’s liabilities as they are discounted at a higher rate.
So, while it would be naïve to describe the asset side of ORIX Life as ‘future proofed’, the new approach of asset-liability matching has at least made it both very stable and increasingly profitable. “I tell all my people that we have a very bright future”, Mr. Yoshida concludes.