Southeast Asian insurers have long allocated the vast bulk of their assets onshore, largely in government bonds, but they are increasingly having to look overseas and at riskier investments for higher yields. They are concerned about the level of capital charges they will face when allocating to such assets.
AsianInvestor spoke to management executives at the Malaysian and Philippine arms of Canada’s Sun Life about how they are coping in light of existing or planned risk-based capital (RBC) rules.
The Philippine unit of Canada’s Sun Life has 95% of its invested assets in local-currency fixed income, mostly government bonds, with a very small portion in dollar bonds and 5% in domestic equities. All assets are managed internally.
Rizalina Mantaring, Philippines chief executive of Sun Life, said the firm preferred to invest domestically because its liabilities were mostly in Philippine pesos and domestic bonds yielded more than most offshore ones.
Philippine 10-year government bond yields stood at 3.39% on August 29, compared to 2.17% for their Thai equivalent. US 10-year treasuries were yielding 1.59% and UK 10-year gilts 0.64% on the same date.
Mantaring is eyeing investments in local infrastructure for higher yield but is put off by the high risk charges under the current RBC rules. “The 30% risk charge for corporate loans makes them unattractive for us,” she said. The refers to the amount of capital an insurer must set aside when allocating to certain assets – in this case, 30% of the total invested in corporate credit.
The RBC regime in the Philippines is being revised, with no set date for implementation for RBC2; the earliest would be next year. On the whole this is positive, as it will result in the country aligning its framework with international practice, noted Mantaring.
“Most of the contentious issues have been resolved, but there are still a few items being appealed,” she added. For example, listed equities under the proposed RBC2 rules will carry a 35%-45% risk charge, up from the current 30%. “This is steep, and the industry is asking the regulator to reconsider,” Mantaring said.
Malaysian insurers are known to have access to more asset classes than their Philippine counterparts, including alternative investments. However, they invest largely domestically in light of restrictions on foreign allocations.
Local insurers can only allocate up to 10% of their portfolio to foreign assets in jurisdictions with sovereign ratings at least equivalent to Malaysia’s, said Catherine Renukha Raju, Sun Life’s Malaysia chief investment officer. Still, the larger players often set aside a small slice of their investments for alternative and foreign assets, she noted.
Sun Life Malaysia’s allocation is spread across ringgit-denominated assets, including government debt, corporate debt and equities.
However, the low-yield environment forces insurers to take on more risk, which will be more costly and punitive under the current RBC rules, said Raju, but the firm will nonetheless need to seek higher-yielding asset classes.
In Malaysia the RBC framework was revised and issued in June 2013, although as the economic environment evolves, many of the moving parts will need to be re-assessed, she noted.
As of March 31, Sun Life had global assets under management of $861 billion, of which $10 billion is in Asia.