Asian insurers target private debt in yield hunt

Insurers in the region are investing in higher-risk products and with longer-term investment horizons as their liabilities increase.

Asian insurers are looking to private debt products as growing liabilities force them to broaden their search for greater yield. Investors are seeking private debt products with higher-risk and longer investment horizons as the duration gap between interest-bearing assets and insurance liabilities widens.

Among the firms looking for allocations to private debt with longer investment terms is Samsung Life Insurance, the biggest life insurance company in Korea with $177 billion in assets under management.

“We will actively seek offshore bonds and loans in line with the current asset-liability matching strategy that requires higher interest income,” Dae-hwan Kim, chief financial officer at Samsung Life said during a second-quarter earnings call.

One factor in the move towards longer-life products is the adoption of new global accounting rules on insurance contracts. IFRS17, the new accounting rule, requires insurance companies to measure their liabilities based not at face value but at current fulfilment value, according to the International Accounting Standards Board (IASB).

“The maximum duration of insurance liability in Korea is to be extended to 25 years from 20 years by year end and extended further to 30 years by the end of 2018,” Jinhae Park, director at the department of insurance compliance examination of Financial Services Commission of Korea told PDI.

The mandatory prerequisites come as the country fully adopts a new accounting standard on insurance contracts by 2021. Financial Services Agency of Japan recently added the accounting rules on insurance contracts that insurance companies incorporated in Japan are subject to follow voluntarily, according to a statement from the IASB published on September 29.

“To mitigate greater interest rate risks associated with the duration of liabilities, some insurers are seeking assets with longer investment horizons as cash flows from their invested assets will be depreciated over a longer period,” Park added.

Risk on

Asian insurers are also now taking on more risk through more diversified tranches and structures, according to Chris van Beek, executive director of real estate and private markets at UBS Asset Management.

He told industry participants, at a speech at the FT Asia Insurance Summit in Hong Kong last Thursday, that “Korean insurers are looking for debt, not only senior debt with a first-lien structure and nice healthy coupon but also mezzanine debt for real estate.”

Taiwanese insurers too have increased their risk appetite for better yields. “Taiwanese insurers are seeking riskier assets as costs of liabilities that were paid to their policy holders are close to the yields generated from investment activities,” Frank Yuen, assistant vice president at Moody’s Investors Service, told PDI.

“The negative spread issue that some Asian insurers are facing pushes them to allocate capital to riskier assets as more demand for higher yielding assets [prevails in the region],” Yuen added.