Asian insurers plan to add duration, credit risk
Asia-based insurers are planning to add more duration risk and credit risk relative to their peers in other regions.
Private equity and private credit are also in favour among the region’s insurers, according to the 2024 Global Insurance Survey by Goldman Sachs Asset Management (GSAM), titled “Risk & Resilience”.
“In our conversations with Asia-based insurers, credit risk is looking to play a larger role in making balance sheet allocations,” Stuart Wrigley, head of the client solutions group in Asia Pacific at GSAM, told AsianInvestor.
Expectations of Fed cuts, peaking US interest rates, and a gradual increase in JGB rates are leading the search for yield among fixed income investors. A combination of these factors provides a promising backdrop for opportunities in credit, said Wrigley..
“We anticipate duration to play a larger role in Asia-based, and in particular, Japanese insurers portfolios moving into 2024. A soft-landing is a commonly held view, with anticipated eases in inflation and projected market growth,” he said.
48% of surveyed Asia-based insurers were planning to increase their credit risk over the next 12 months, which is more than surveyed peers in the Americas (32%) and EMEA (34%). For duration risk, 45% of surveyed Asia-based insurers were planning an increase, again more than peers in the Americas and EMEA (both 41%).
PRIVATE CREDIT CAPACITY
Among the surveyed Asia-based insurers, 52% expected to increase private credit. This was higher than EMEA peers (35%) but lower than US peers (60%) over the next 12 months.
Asian insurers are generally experiencing more rapid growth than European or US insurers and have more capacity to increase private credit allocations. The spread of private credit over other alternatives is more pronounced in the Asian markets given the less developed corporate bond markets, according to Wrigley.
“Much of private credit is floating rate which makes it easier to hedge currency risks compared to longer dated fixed income instruments found in the public markets,” he said.
Recent and ongoing capital regime changes in Asia are also adding to the tailwind for deployment into private credit. Under the new capital requirements, insurers in the region will likely have to keep their current fixed income exposure.
“Allocating to private credit can help insurers optimise their fixed income book, potentially providing incremental income enhancement, resilient returns, and downside risk mitigation. Even as interest rates move lower, we expect private credit to continue gaining traction,” Wrigley said.
The survey also showed that private credit was the asset class where most insurers globally (53%) considered to outsource management over the next 12 months, followed by private equity (35%) and developed market investment grade corporate debt (28%).
PRIVATE EQUITY PUSH
Another noteworthy finding in the survey was that Asia-based insurers seem significantly more bullish on private equity relative to their peers in other regions.
42% of surveyed insurers in the region expected to increase their allocation to private equity over the next 12 months, while only 22% of peers in the Americas had similar plans.
“With rapidly growing and well-capitalized balance sheets, Asian insurers have more capacity to invest in equity assets and show a preference to private equity,” Wrigley said.
The survey was based on 559 responses from chief investment officers and chief financial officers, of which 19% are based in Asia, 41% in the Americas, and 43% in EMEA. Responses were collected in January and February 2024.