Lower rates push Asian life insurers to alter investment mix

Insurers are shifting their asset allocations to US credit investments.

Economic disruptions are forcing Asian life insurers to adapt lower-for-longer interest rates, potentially resulting in lower yields on assets and headwinds on asset-liability duration management and solvency positions, according to a Moody’s Investors Service report.

How the sector will change investment mix as they prepare for these changes will determine their credit performance, analysts said.

The recent widening in credit spreads on high-quality US corporate securities and falling hedging costs on currency risk are key drivers for insurers to gradually shift their asset allocations to US credit investments. However, an alternative practice for credit investments by Chinese and Hong Kong insurers include re-evaluating corporate exposures, leading to a more cautious attitude on credit investment in general.

This particularly highlights Chinese insurers’ wariness of corporates’ credit quality because of suppressed economic growth.

Many Asian insurers, especially in Japan and Taiwan, have relatively wide asset-liability duration gaps compared with global peers, the report said. As a result, many will need to continue buying long-dated local government bonds to cut their duration gaps.

“However, lower domestic interest rates discourage insurers to proactively purchase such bonds. Some insurers in Hong Kong, Japan and Korea are pursuing more active, nontraditional approaches, such as the use of swaps, swaptions and reinsurance transactions, to reduce duration gaps,” analysts explained.

Economic pain points have also depressed equity market valuation, which some insurers will deem it as a chance for selective increases in their equity portfolios. More Asian insurers are also likely to raise their alternative investments, as another source of yield enhancement in this period, the report concluded.

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