Insurers adjusting to expected US rate rises

Asia’s increasingly cash-rich but yield-starved insurance firms are casting an envious eye over US fixed income markets, where income returns are on the rise.
Insurers adjusting to expected US rate rises

Asian insurers have been investing more in dollar debt and/or shifting up the risk curve in anticipation of higher US interest rates, market insiders tell AsianInvestor.

With their assets under management swelling as the region’s middle class expands and more people buy insurance, and with local bond yields depressed, insurance firms are looking beyond their usual comfort zones, albeit cautiously.

Such moves are taking place as the new US president makes baby steps with his pro-business agenda of corporate tax reform and infrastructure expenditure.

“I’ve seen heavy flows [from insurers in Asia] go into US investment-grade credit, plus floating rate and high yield,” said David Lomas, global head of insurance asset management business at BlackRock. “Insurers are really extending their exposure to asset classes they know well.”

Life insurers are typically heavy investors in fixed income, because the asset class carries a defined return and is often long-dated. It is also viewed as less risky than equity.

Mark Konyn, chief investment officer at Hong Kong-based insurer AIA, said last year that his firm typically has around 85% of its portfolio in fixed income. Jeffrey Tan, Asia director of investments at Belgium’s Ageas, said 70% of his portfolio is focused on local government and corporate bonds, with some local-currency bonds from foreign companies too. Paul Carrett, group CIO at life insurer FWD, said his company also emphasised local debt exposure, but declined to given a figure.

Asia’s insurers mostly invest the assets they receive from one country into said nation’s local-currency markets, particularly government bonds. While some markets have seen slight inclinations of inflation, to date there have been no rate shifts. And bond yields remain very low, especially in north Asia.

South Korea’s 10-year local government bond offered a yield of 2.15% on April 3, while Hong Kong’s 10-year bonds were yielding 1.51%. Japan’s 10-year yield, meanwhile, sat at 0.07%, as the Bank of Japan kept the yield at zero in an ongoing attempt to push up inflation.

Appealing US yields

Set against these figures, the US 10-year Treasury’s 2.4% yield appeals, and is likely to rise further in line with the consensus expectation that rates will rise.

Economists at BlackRock, the world’s largest asset manager, predict that the yield on 10-year US Treasuries will reach around 3% by the end of 2017 and rise to 3.3% by December 2018.

To be sure, insurers in Asia have the ability to take advantage of the potential for US rate rises.

Their bond investments are constantly maturing, and they can recycle these principals into new dollar bonds. Added to that, Asian insurers’ AUM is rising fast on the whole.

They can redirect some of this towards bonds with higher returns and, as buy-and-hold investors, they are less concerned about mark-to-market losses as rates rise and yields back up.

Wayne Bowers, CIO for Asia Pacific and Europe at Northern Trust, agreed that the opportunity is there. “If you consider Asian or Japanese investors’ perspective, US yields already look good – even high yield,” he told AsianInvestor. “And if you put US high yield into the mix too, which could well gain if the economy grows, you can see a very good yield-to-maturity on fixed income risk, if you’re an Asian insurer.”

No seismic shift

However, he believes such a seismic shift has yet to get really going, as many Asian insurers are still changing asset allocations within the currency rather than raising outright dollar exposure.

“Most are keeping their currency exposures neutral and taking advantage of a strong rally in US markets to allocate more risk into fixed income [by selling US equity positions],” Bowers said.

Certainly some are playing it safe, despite the market’s consensus expectations.

Ageas’s Tan told AsianInvestor: “We are always cautious that rates might still fall, although we know we are looking at possible reflation now,” he said. “It’s important to be positioned in our balance sheet so that in the event that rates … fall we are well positioned.”


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