Insurance companies in Indonesia look set to keep building positions in decently yielding fixed domestic income assets as their asset bases continue to grow. Overseas investments are proving far less tempting, although some companies are eyeing specific equity investments, and even considering alternative assets for the future.  

AsianInvestor understands that domestic lifers in Indonesia are generally looking to allocate more assets into local government and corporate bonds. While some have plans to deploy money overseas as well, they are pacing themselves cautiously over concerns that the recovery rate of the global economy is still uncertain, amid the ongoing impact of the Covid-19 disease.

Life insurance companies typically invest the bulk of their assets into domestic fixed income, to both eliminate foreign exchange risk and ensure a predictable level of return. For Indonesian insurers these advantages are supplemented by the fact that very attractive yields can be easily found in local debt.

The country’s benchmark 10-year government bond yielded 7.41% as of July 2, considerably higher than that of other countries. Thailand’s equivalent government bond offered just 1.33%, while 10-year US treasuries yielded 0.69% as of July 1.

Jemmy Paul Wawointana
Jemmy Paul Wawointana

“Three-year and five-year corporate bonds are quite interesting because of the yields; some with a ‘AA’ or ‘A’ rating from a local rating agency can offer as much as a 10% coupon rate so they [local insurers] are allocating more money to bonds,” said Jemmy Paul Wawointana, Jakarta-based chief executive of Sucor Asset Management. His firm has $1 billion of assets under management (AUM), with over 70% of their institutional money belongs to local insurance companies.

“While Indonesia has been affected by the oil price shock (prices have fallen from $66.25 per barrel at the beginning of 2020 to $42.01 year-to-date as of July 1.) and by a selloff in the currency, we continue to find some opportunities there both on quasi-sovereign corporate side and also on the sovereign side,” said Riti Samanta, head of systematic fixed income and currency strategy for GMO, a US-based investment manager.

According to figures from Indonesia’s Financial Services Authority (OJK), life insurers respectively are believed to own between 10% and 15% in local bonds. Prudential Indonesia, for example, had 13.4% in debt instruments as of the end of the first quarter of 2020. It had IDR65.3 trillion ($4.61 billion) in assets.

Local equities are proving less appealing, because they have largely disappointed local insurers. The Jakarta Stock Exchange Composite index was down over 21% year-to-date as of July 2. However, Wawointana said local insurers are still eyeing more equity allocations, albeit carefully due to the current economic uncertainty. He said pockets of opportunities, such as financials, remain for insurance companies eager to buy in the dip.

The chief investment officer of Prudential Indonesia Novi Imelda also said the firm preferred defensive equities in sectors such as technology and consumer goods during the Covid-19 outbreak.

Overall, it would also be expensive for local insurers to allocate overseas, as the cost of hedging the Indonesian rupiah against the US dollar could be as much as 3% to 5% of any amount, said Wawointana. Indonesian insurance companies are currently bound by a 20% overseas investment limit, but none have anywhere near this level. 

INSURANCE EXPANSION

While Indonesian insurers are set to remain locally focused for the time being, this could begin to change as the local insurance market internationalises further.

In January the Jakarta-based government raised the permitted foreign ownership rate in insurance companies to 80%. This had led to moves by multinational players to expand their presence there. Hong Kong-based regional insurer FWD, for example, announced plans to invest in a significant minority stake in PT Asuransi BRI Life on June 19. It has also purchased US firm MetLife's Hong Kong business.

“The growth in the country’s GDP and middle class population presents compelling opportunities for us and the insurance industry as a whole,” an FWD spokesman told AsianInvestor. The executive declined to comment on how the AUM and asset allocation of the firm’s local unit will change after the investment. 

According to GlobalData, the Indonesian life insurance industry's gross written premiums grew 78% to an estimated IDR180.2 trillion ($12.7 billion) in 2019 within five years. The industry is expected to expand at a compound annual growth rate of 7% to reach IDR253 trillion in 2024.

 

Despite the long-term growth trends, it has been a tough 2020 so far. The Indonesian insurance industry's total assets dropped by 5% to IDR509.6 trillion ($35.4 billion) as of March 31, from IDR536.7 trillion year-on-year.

Rakesh Vengayil, Hong Kong-based Asia Pacific deputy chief executive of BNP Paribas Asset Management, said his firm’s Indonesian unit has received some inquiry about asset diversification, and has some managed investment mandates from Indonesian insurers that focus on Chinese and European equities. Indonesian insurance companies account for around a quarter of the AUM of his firm's domestic arm. 

He said that he has also begun to see some insurance companies from the country looking at alternative asset investments. “It's something you cannot ignore from a long-term perspective,” he told AsianInvestor.

Wawointana agreed, noting that he has seen some of the largest insurance players invest in private fintech companies. However, Vengayil cautioned that the trend to allocate to alternative assets is still nascent compared to developed market due to the lack of investible opportunities within Indonesia itself.