(Bloomberg) -- Japan’s largest listed life insurer has a dilemma — its traditional investment strategies aren’t working. 

Yields on Japanese government debt are too low. Foreign bonds have too much currency risk. And the company is cutting its holdings of domestic equities, which are surging, to avoid too much exposure to the asset class. 

As a consequence, Dai-ichi Life Holdings Inc. has begun to include more alternative investments in its 33.9 trillion yen ($219 billion) portfolio. The company is also looking at increasing mergers and acquisitions and will only start buying 30-year JGBs again once yields rise to 2%. 

“We have to be cautious and carefully examine risks,” said Tetsuya Kikuta, the insurer’s CEO.  “But we have to shift a certain amount to assets like private credit, private equity, infrastructure and real estate.” 

Insurers have long been major investors in super-long JGBs because they need to own investment assets that generate stable income for years to pay for insurance obligations often spanning decades.

Market expectations for insurers to ramp up JGB buying have gained momentum after the Bank of Japan terminated the negative interest policy last month. However, yields remained below what the company gauged to be sufficient for investment. 

“We haven’t witnessed a big rise on the long end of the yield curve yet,” Kikuta said, adding the company will start buying super-long JGBs once the yield on 30-year note nears 2%. Yields on the notes were at 1.94% as of April 17. 

Given JGBs’ paltry returns, US Treasuries and other foreign bonds used to be an attractive investment for insurers. That changed since once the Fed started aggressively raising rates, which drove up hedging costs, more than wiping out the returns on the notes. 

Kikuta said his company is unlikely to resume foreign bond investment, as recent economic data further pushes back the expected timing on rate cuts by the US Federal Reserve. Foreign bonds without currency hedges are also off the table, given the yen’s sharp decline, which poses risks for losses when the Japanese currency reverses course. 

“I expect a very difficult time to remain for a while for foreign bond investment,” he said.

Even the rally in Japanese stocks is causing Dai-ichi a headache. The company said last month that it would cut its domestic equity holdings by 1.2 trillion yen over the next three years to reduce risks in its investment portfolio. The Topix index has gained 12.5% so far this year and the Nikkei 225 has risen to a record high. That’s undermining the company’s efforts to rebalance its portfolio.

“The 1.2 trillion yen figure is based on the latest market value.” Kikuta said. “We will consider additional reduction if the market value further increases.” 

M&A is one area where Dai-ichi does want to allocate more resources. The insurer is hunting for acquisitions to expand overseas and add non-insurance businesses at home. The firm plans to spend 300 billion yen over the next three years for acquisitions. Kikuta said insurers and asset managers are primary overseas targets.

As part of its strategy, Dai-ichi agreed to buy Benefit One Inc., a Japanese company that provides employee benefit programs, for $2 billion last month. The company has set up an M&A team to focus on a growing list of potential deals and is hiring outside talent.

Dai-ichi will aim for bigger acquisitions once it hits its capital efficiency goal during the current three-year plan that ends in March 2027.

“Then, we will be able to allocate more cash flow to strategic investment, allowing us to pursue much larger deals,” Kikuta said.“We have many (targets) on our long list and short list.”  

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