Asian life insurers expected to change investments due to pandemic

Lower-for-longer interest rates amid the coronavirus pandemic will drive changes in Asian life insurers' investment mix, Moody's Investors Service said in a new report.

Interest rates across Asian economies will stay lower for a longer period because of the disruptions caused by the coronavirus outbreak.

These lower-for-longer interest rates are negative for insurers because they will lower yields on assets and challenge asset-liability duration management and solvency positions.

How Asian insurers change investment mix as they prepare for these changes will determine their credit performance, the rating agency noted.

Moody's expects broad inflows to US credit markets will continue and yield enhancement will be a key driver of insurers' stronger appetite for US credit risk.

The recent widening in credit spreads on high-quality US corporate securities, plus falling hedging costs on currency risk, is driving insurers to gradually shift their asset allocations to US credit investments from domestic fixed-income assets, mostly sovereign bonds with low yields.

However, there is an alternative practice for credit investments by Chinese mainland and Hong Kong insurers, the report said.

Some insurers in those markets reassess their corporate exposures in light of economic shocks from the coronavirus outbreak and therefore are now cautious about credit investment in general.

In particular, this reflects Chinese insurers' cautiousness of corporates' credit quality because the region's economic growth remains subdued.

Meanwhile, duration gap management will remain difficult amid low domestic yield, adds Moody's.

Many Asian insurers, especially in Japan and Taiwan, have relatively wide asset-liability duration gaps compared with global peers and many will need to continue purchasing long-dated local government bonds to reduce their duration gaps.

Some insurers in Hong Kong, Japan and South Korea are pursuing more active, nontraditional approaches, such as the use of swaps and reinsurance transactions, to reduce duration gaps.

There will be selective increases in equity and alternative investments for life insurers, according to the report.

Current economic weakness and uncertainties have also depressed equity market valuation, which some insurers, especially those in China, will see it as opportunities for selective increases in their equity portfolios.

Moody's also expect more Asian insurers to increase their alternative investments, such as infrastructure investments, private equity, hedge funds and real estate, as another source of yield enhancement in this period of lower-for-longer interest rates.

Chinese insurers are the most progressive in establishing alternative investments as a viable asset class.