GIAJ: Guidelines for strategic shareholdings

The General Insurance Association of Japan (GIAJ, or Sonpo in Japanese) this week issued guidelines for the classification of strategic shareholdings, addressing concerns that these have been reduced merely accounting-wise by re-classifying them as investment securities.

Introduction

Strategic shareholdings have been held by insurance companies primarily to maintain and strengthen long-term and stable insurance business relationships with customers. However, the ownership ratio of these stocks has had a significant impact on insurance underwriting shares, which has in fact hindered fair competition.

The GIAJ believes that, in light of the administrative action taken against its member companies in December 2023 by the Financial Services Agency, it is necessary to completely eliminate the influence of strategic shareholdings, which is one of the root causes of distortions in the fair competitive environment. The GIAJ aims to reduce the outstanding amount of strategic shareholdings as soon as possible and bring it to zero.

Furthermore, if the reduction in the balance of strategic shareholdings merely results in a reclassification of these stocks into pure investments and their continued holding, it could lead to a resurgence of holding competition through such reclassification, which would not constitute a fundamental solution to the realization of a fair competitive environment.

Moreover, deposits, loans, etc., intended to gain insurance market share can also hinder fair competition in the insurance market, and therefore, these practices also need to be rectified.

In view of the above, these guidelines for strategic shareholdings are established as subordinate regulations to the “Guidelines for Asset Management” stipulated by the GIAJ in order to encourage appropriate and disciplined conduct by each company with regard to strategic shareholdings.

Classification of Investment Stocks

Non-life insurance companies may acquire investment stocks with different investment objectives in addition to strategic shareholdings that need to be reduced. It is important for each company to classify these investments appropriately according to their investment objectives. For example, the following investment classifications are conceivable:

Examples of Investment Classifications

• Pure Investment Stocks: Stocks held for the purpose of receiving profits solely from fluctuations in the value of the stock or from dividends related to the stock.
• Strategic Shareholdings: Stocks held for the purpose of maintaining and strengthening relationships with insurance clients through stable holding. This includes stocks issued by insurance agents and stocks of parent companies and subsidiaries of insurance clients (including insurance agents), which may hinder fair competition in the insurance market.
• Investment Stocks Related to Business Strategies: Stocks held for the purpose of capital and business alliances, acquisition of technology and knowledge of investees, etc.

In addition to the above investment stocks, each company may also hold affiliated company stocks (stocks held through investments in subsidiaries and affiliates).

Basic Approach to Strategic Shareholdings

(1) No new holdings of policy-held stocks will be allowed.

(2) Efforts will be made to reduce the balance of existing strategic shareholdings (including unlisted stocks) as soon as possible. In particular, a clear deadline will be set to reduce the holdings of listed stocks to zero.

(3) Similarly, no other acts that could hinder fair competition, such as deposit cooperation, will be allowed.

(4) Investment stocks shall be appropriately classified according to their investment objectives, and specific and sufficient explanations shall be provided in their disclosure based on Cabinet Office ordinances and other relevant regulations concerning the disclosure of corporate information.

(5) The following points should be noted when holding shares of insurance clients as pure investment stocks. However, no reclassification of strategic shareholdings into pure investment stocks will be made without changing the actual holding status.

Ensuring the Discretionary Nature of Sales

• The sale and timing of the sale are not restricted by the intention of the issuing company.
• Reclassification from strategic shareholdings to pure investment stocks will not be made without the consent of the issuing company to sell the shares freely.
• In addition, it is conceivable to obtain opinions from third parties to ensure the appropriateness of the reclassification.

Independence of Decisions by Asset Management Departments

• The asset management department makes independent investment and voting right exercise decisions, without exchanging information on individual stocks with the sales department, both physically and in terms of personnel.

Appropriate Exercise of Voting Rights

• The asset management department will continue to exercise voting rights appropriately in order to enhance the corporate value of investees, so as to prevent the hollowing out of voting rights.
• The “Guidelines for the Exercise of Voting Rights” established by the GIAJ should also be referred to.

Development of Operational Structure and Personnel

• Necessary organizational and personnel structures will be established to enable appropriate investment decisions, exercise of voting rights, and dialogue with investees.
• An appropriate number of personnel with the necessary knowledge and experience will be assigned, depending on the actual operation of pure stock investments.

Discipline and Effectiveness of Investment Processes

• Portfolio investments will be made under an investment strategy and risk management, and the effectiveness of investment processes will be ensured.
• In doing so, it is conceivable to periodically evaluate whether the actual investment status is consistent with the investment strategy, including the return target, and investment criteria.

Proactive Disclosure

• Proactive disclosure will be made on these points from the viewpoint of ensuring transparency.
• When reclassifying strategic shareholdings into pure investment stocks, it is conceivable to disclose the reasons for the reclassification, the voting right exercise criteria after the reclassification, the results of the exercise of individual voting rights, and the status of cross-shareholdings.

(6) When holding shares of insurance clients as investment stocks related to business strategies, appropriate disclosure should be made after clarifying the purpose of the holding, such as capital and business alliances.

Points to Note

These Guidelines are not legally binding, but it is expected that each company will, in principle, comply with these Guidelines to realize a fair competitive environment.

Authority to Revise and Abolish

These Guidelines shall be reviewed and enhanced as necessary in accordance with the Insurance Business Act, the Financial Instruments and Exchange Act, and other relevant laws and regulations. Any revision or abolition shall be decided by a resolution of the Finance Committee.

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