For companies based in some of the most thriving economies in the world, insurance firms in Southeast Asia aren’t having the easiest time of it. They are caught between the need to find returns amid lower yields, and the need to prepare for the onset of regulations that promise to make some investment instruments more capital-intensive.
On the investment front the region's insurers are, like their global counterparts, finding it more challenging to find yield in a persistently low-interest-rate environment.
The region's insurance companies have typically invested clients’ premiums into bonds, usually those of their local governments. Such investing used to serve two purposes: they matched duration to insurers’ liabilities, and they enhanced returns – back when local bond yields were relatively high.
But yields across the world tumbled when the US Federal Reserve started cutting rates in 2008 to boost the global economy. Singapore offers one example; its 10-year government bond yielded 5.69% at its peak in 2008, but this had tightened to 1.85% as of September 20, according to Trading Economics.
Local government debt still plays a major role in duration-matching for Asia’s life insurers, but it is no longer an attractive source of investment income.
It’s a global issue. Bond yields have fallen across many markets in the developed and developing worlds. Today, finding enough return on investments is proving a major headache.
“The investment environment year to date has not been smooth-sailing,” Serene Tan, Singapore-based principal consultant at investment consultancy Mercer, told AsianInvestor. “Global growth has weakened, the equities market has been volatile and the low-interest-rate environment looks set to stay for another one to two years.”
Depressed yields on government bonds have led some Southeast Asian insurers to move more assets into corporate bonds. But it’s no perfect solution.
“[Buying corporate bonds] itself present challenges,” Tan said. “The market liquidity is not what it used to be before the global financial crisis. This is especially true of Singapore’s corporate bond market – at times, it’s difficult to source well rated corporate bonds.”
Investment banks used to hold caches of bonds on their trading books, but increasingly onerous capital rules have led them to largely withdraw from this business. That means lower liquidity, which in turn has hampered the ability of insurers to source and buy or sell corporate bonds.
Yields in many government and investment-grade bonds have fallen worryingly close to the guaranteed rates some life insurers in Southeast Asia have offered in their long-term products in recent years. As a result, they have started to look for extra yield from alternative assets.
“They may try to wait and hold more cash in the hope that yield will go up some day and they can lock in a higher yield,” said Alan Yip, head of Asia insurance strategy at JP Morgan Asset Management. But holding more cash puts a drag on returns, he noted.
Finding other asset types isn’t always easy. Southeast Asian insurers face regulatory constraints on investing into certain asset classes and markets.
For instance, Thailand's insurers are barred from investing more than 15% of their total assets offshore or buying into hedge funds. They would like to buy higher-yielding assets, given that the country's 10-year government bond yield was 2.28% on September 20, having stood above 5% before the 2008 global financial crisis and over 3% until mid-last year, according to Trading Economics.
It’s proving to be very frustrating. Sutee Mokkhavesa, senior executive vice-president of risk and strategy at Bangkok-based Muang Thai Life, said: “The industry has urged the Office of the Insurance Commission to deregulate so that we can better diversify our portfolio, since the Thai fixed income market lacks sufficient breadth and depth.”
The firm is eyeing more offshore investments and alternative assets, but is awaiting more details of the regulations before it will proceed, as reported.
Sutee declined to tell AsianInvestor what Muang Thai’s annual average return rate needs to be, but said the local government bond market offers relatively short durations, which makes the job of insurers even tougher. “We need a lot of longer-duration bonds," he noted. "As the interest rate drops, our liability shoots up faster than our assets.”
Look out for part two of this AsianInvestor magazine story, which discusses the likely impact of proposed new regulations and how insurers are sizing them up.