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INVESTMENT AND RISK MANAGEMENT Fundamental Investment Policy with smaller transaction amounts. Despite the advan- Giving due consideration to stability and profitability tages, these new areas require a considerably higher that are required in the investment of insurance reserve level of investment expertise compared to traditional funds and to the long-term prospects of life insurance investments. contracts, Dai-ichi has established its fundamental In fiscal 2001, Dai-ichi began these alternative invest- investment policy based on the ALM (Asset Liability ment activities with full force. Our specialists overseas Management) approach which considers the long-term are working hard to put together a substantial global perspective of the balance between assets and liabilities. structure for alternative investments. Specifically, our investment portfolio is built around a Additionally, we are undertaking joint research and core of yen-denominated fixed income assets, consisting investment with our partner Yasuda Fire and Marine in mainly of domestic bonds and loans. At the same time, an effort to strengthen our investment capabilities. we are striving to increase the profitability of our port- folio by incorporating into it stocks and Risk Management Structure foreign securities within the range of risk The basic goal of our risk management in that is prudent for maintaining our finan- investment is to maintain risk at an cial soundness. Additionally, as a result of acceptable level and to sustain our finan- our carefully planned risk management cial soundness while paying close atten- system, we have made risk-monitoring tion to the balance between risk and more reliable and increased the efficiency return from a mid to long term perspec- of investments. tive. We control the overall asset risk by the mid to long term allocation of our Asset Allocation assets based on ALM. The market risk, credit risk, and Along with our basic policy for utilizing financial other risks related to individual assets are monitored on assets, we had the following asset allocation priorities a daily basis. for fiscal 2001: On the organizational level, daily risk management is • Improve our financial health by reducing our total handled by investment execution sections, while the outstanding bad loans and work to raise the quality of “Investment Risk Management Department” carries out our portfolio by reducing low profit, high-risk assets integrated risk management and submits reports to such as real estate. senior management. The “Investment Risk Management • Increase profitability. Considering the current diffi- Committee” meets every month to allow senior manage- cult investment environment, continuing low interest ment a shared knowledge of up-to-date risk issues. It rates and poor stock market performance, we are functions as a decision-making body with the power to working to restrain decreases in interest and dividend impose restrictions and recommend counter-measures to revenue by reducing our short-term investments and prevent excessive risk. The investment administration sec- purchasing domestic and foreign public bonds. tions and execution sections are kept separate to maintain independent Advanced Methods for Increasing exercise of their Investment Flexibility control func- Dai-ichi is beginning to utilize alternative investments to tions. The proper increase the flexibility of our investment activities. These roles and authori- include private equities, hedge funds using arbitrage trad- ty of each section ing and derivative techniques and also securitized products. are clearly stipu- These allow for a diversification and reduction of lated by company the portfolio risk, and enable efficient investment regulations. A NNUAL R EPORT 2002 6 Accordingly, a long-term ALM strategy that extends far into the future is required. In 1996, we introduced sectional accounting to our internal administrative accounting structure. It consists of individual product groups with varying liability characteristics thus enabling more efficient business administration. Our ALM methods are different within each product group, but the following key objectives apply for all groups. 1) Maintaining steady earnings that exceed liability costs (expected rates of return). ALM (Asset Liability Management) Activities 2) Determining a fair and equitable dividend policy. As the Japanese economic and financial environment under- 3) Maintaining proper liquidity for payment of insur- goes drastic change due to financial deregulation and market ance claims. liberalization, the financial institutions within this environ- 4) Maintaining adequate solvency as a risk buffer in case ment are also experiencing sweeping change and numerous of deterioration in the investment environment. new risks. Given these extraordinary conditions, the role of A mid to long-term investment policy for each ALM in controlling acceptable risk and monitoring the state product group is determined based on these key objec- of operating assets and liabilities (insurance contracts) is tives, and is submitted to the board of directors. increasingly vital to life insurance management. Compared We will continue to concentrate on increasing mid to other financial institutions, life insurance companies hold to long term profitability and maintaining financial longer-term contracts, constituting most of their liabilities. soundness by applying the ALM approach. I Dai-ichi’s ALM Analysis of current liability Economic Analysis of current characteristics and and investment assets and Future outlook Financial Future outlook Scenarios • Insurance period • Investment period • Liability costs (expected rates of return) • Investment income and risk • Cash flow, etc. • Liquidity, etc. Expected investment revenues Risk below expected rate Cash flows, etc. Determination of mid-long term investment policy Anticipated cash flow for the fiscal year, etc Determination of investment policy for the fiscal year A NNUAL R EPORT 2002 7
"INVESTMENT AND RISK MANAGEMENT"