Muang Thai Life, Thailand’s second-biggest insurer by assets, is considering boosting its equity allocation and working with the country's regulator to broaden the range of permitted investments to include asset types such as syndicated loans and infrastructure funds.
The development comes as Thai insurers, which are largely barred from investing in alternatives, are being driven by the low-rate environment to change their habits by investing more in stocks, higher-yielding bonds and other assets in search of better returns, industry participants told AsianInvestor.
“We’ve seen rates lower [in Thailand] for a longer period than usual,” said Sutee Mokkhavesa, head of risk, strategy and unit-linked investments at Muang Thai Life, which has $12 billion under management. “It’s getting tougher and tougher [to maintain returns], so one thing insurers do is go down the credit spread spectrum to get more yield."
Thailand's benchmark interest rate currently stands at a near-record low of 1.5%, where it has been since 2015.
Life ensurers are also being forced into assets such as collateralised loan or real estate investment trusts thanks to the scarcity of bonds with tenors of more than 10 years, Vasin Vanichvoranun, executive chairman of Bangkok-based Kasikorn Asset Management, said.
Such portfolio adjustments mark a significant shift for Thai life insurers – typically very conservative investors with 90%-plus allocations to fixed income, mostly in high-grade domestic bonds.
They are making such moves even as the Office of Insurance Commission (OIC) is about to introduce new risk-based capital rules (known as RBC2). The framework, to be phased in from 2018 over several years, will increase the level of capital that insurers must hold when they invest in certain assets deemed risky by the regulator.
“Insurers must weigh carefully the additional yield pickup against the increase in credit risk as well as incremental capital requirements [under the new RBC2 rules]," Sutee told AsianInvestor. "We also need to really look at our strategic asset allocation to see if more weight should be given to equities.”
High-grade domestic bonds have in the past provided sufficient returns, but now the industry is having to rethink its portfolio allocations, and it is largely restricted to local stocks and bonds, he added.
There are other challenges in the offing too, not least changes in the US yield curve, which measures the difference between yields on short-term US interest rates and on longer-dated US Treasuries. This has flattened in recent months as the Federal Reserve has tightened monetary policy and US bond markets have remained relatively stable, and could yet invert if short-term policy rates keep going up while US bond yields stay broadly where they are.
“The worst thing for life companies is for the interest rate yield curve to be inverted, because our assets are short and our liabilities are long,” Sutee said.
Eyeing new alternatives
Thai insurers would like to see other investment options on the table, such as a wider range of alternative assets. Private equity is permitted to a limited extent but some firms are working with the OIC to allow them to also invest in private debt or infrastructure-linked assets.
Offshore infrastructure funds and syndicated loans for infrastructure projects, for instance, are well suited to the long-dated portfolio needs of insurers. Banks could take on the greenfield risk and finance the first few years of a power plant, Sutee said, while insurance firms could finance the rest.
Industry participants said the regulator is open to discussing alternative assets but is very cautious about permitting moves into new types of investment. As a result, it is likely to be at least two years before local insurers get access to a wider range, with domestic alternatives likely to come first, insurance executives told AsianInvestor.
Muang Thai is also eyeing a higher foreign-exposure limit than the current 15% of the invested assets, as it expects to raise its overseas allocation over time.
The Thai Life Assurance Association is working with the OIC to potentially lift the offshore investment limit, possibly up to 20% or 25%, even if most domestic insurers are nowhere near reaching that cap, Sutee said.
In making changes to their strategic asset allocations, Thai insurers are having to take into account not only the greater volatility of stocks versus bonds but also RBC2.
Under the second-generation framework, the amount of extra capital that must be set aside for equity allocations is set to rise from 16% to 35% for both local and foreign stocks. The rules are due to be phased in from next year over the course of several years to allow the industry to adapt.
Sutee told AsianInvestor in August last year that Muang Thai Life would revise its asset allocation to reflect the RBC2 rules, but the industry is still waiting for them to be finalised.
At the time, the firm had more than 80% of its portfolio in domestic fixed income – mainly sovereign bonds – and the rest in equities and real estate. It has nearly 10% in offshore markets, across debt and stocks. Sutee declined to reveal Muang Thai Life's current allocations.