Thailand's life insurers are currently reaping the benefits of a 29% gain over the past three months in the domestic equity benchmark SET, but for how long?

As with most insurers, the companies are heavily exposed to local investments, and rely on equities to gain some decent portfolio returns. But while they have ridden the SET index’s increase in valuation, it remains down 15.6% as of June 25 year-to-date, meaning overall their investments are still in the red versus the beginning of the year.

Worse, Fitch Ratings is forecasting the index will drop by 35% between January 1 and December 31. 

The rating agency also maintained a negative outlook towards local insurers, after having revised the outlook on Thai Life and Muang Thai Life to negative in May. In the case of the latter, Fitch said its “larger-than-peer” equity allocation of around 15% has exposed the firm to potential rising loss. According to Thailand’s Office of Insurance Commission, local insurers allocated about 10% of their portfolios to the asset class in 2019.

Thanasit Utamaphethai
Thanasit Utamaphethai

“Even though the rated Thai life insurance companies don’t have excessively large holdings of high-risk assets, particularly stocks and Reits [real estate investment trusts], we see that the downside risk could be quite big, per our assessment, if the drop in the local market persists for a longer period,” said Thanasit Utamaphethai, associate director of insurance for Fitch Ratings, during an interview on June 19.

And the risk for local equities look ominous. On June 19, the Bank of Thailand asked commercial banks not to buy back shares or pay interim dividends, triggering a selloff on Monday of financial stocks including Siam Commercial Bank and Bangkok Bank.

Jitipol Puksamatanan, the head of market strategy at SCB Securities, told AsianInvestor that while stocks with stable and sustainable dividend should be more appealing to insurers, they had to bear in mind that the payout may vary under different business and regulatory environments.

Jitipol Puksamatanan
Jitipol Puksamatanan

Moreover, Vasin Vanichvoranun, executive vice president of Kasikorn Bank, said that an ongoing risk lies in how the authorities strike a balance between reopening the economy and containing the spread of the coronavirus.

He added that the SET index would likely hit 1,400 by the end of this year, 2.56% up from the current level. At the same time, Jitipol forecasted a downside of around 5% to 10%, if the second-quarter earnings turn out to be weaker than market expectations.

“The current market has already priced in all the good news towards next year, it will remain sensitive to any negative surprise data,” noted Rachada Tangharat, the senior director of business development at UOB Asset Management Thailand. Valuations are also expensive, with a price-to-earnings (P/E) ratio at close to 21 times, versus its five-year average multiple of 15.7.

“Thai equity markets should be able to maintain momentum, (albeit slower than the previous period) due to ample liquidity, easing monetary and fiscal policies, and the gradual release of lockdowns from Covid-19,” Vasin said.

HANDS ARE TIED

Despite potential risks in the domestic stock market, Thai insurers may not have much choice but to stay exposed. Their fixed income portfolios look set to produce minuscule returns after the Bank of Thailand reduced the interest rate three times this year to 0.5%.

AsianInvestor asked three Thailand-based life insurers to answer questions on their investment plans in the current conditions; none responded. However, Jitipol predicted the insurers will be concerned about the current fixed income market conditions. 

“I forecast the 10-year Thai government bond yield to end the year around 1.5%, and the credit spread for investment-grade bonds should be around 100 basis points, meaning that current prices are very expensive and might not be enough to fund portfolios in the long-run,” he said.

In addition, corporate bonds’ liquidity remains below average, said Rachada.

“Nonetheless, there has been greater interest in highly-rated corporate bonds, particularly the AAA-rated corporate bonds, but their spreads have been wider than usual,” she said.

Around 80% of local insurers’ assets are allocated to fixed income, with some firm’s proportion reaching as high as 90%, AsianInvestor understands. In the case of a sizeable insurer, around 80% of its fixed-income portfolio is domestically focused.

While the industry watchdog has eased Thai insurers’ offshore investment cap, hedging their exposure remained a challenge, so moving towards global fixed income might be tricky.

Plus, insurers are only allowed to invest in investment-grade assets, so fallen angel risks could be worrying as well.

“These regulations helped maintain the quality of their fixed income securities for the insurers in Thailand,” said Thanasit. “However, the impact might be realised if there is any rating migration to the companies whose credit ratings are at the borderline of investment-grade and below-investment-grade.”

Thai insurers can at least take comfort in their relatively high capital adequacy ratios, which should enable them to weather the crisis. Both Thai Life and Muang Thai Life’s regulatory risk-based capital ratio should rest well above the 140% minimum requirement. On the industry level, Thai insurers’ capital adequacy ratio reached 387% at the end of the third quarter last year.