Insurers Shift To Fixed Income Due To Regulatory Changes

China Life Insurance Overseas and Manulife Asia are expected to continue adjusting their investment portfolios towards fixed-income assets through 2024. This decision is influenced by the anticipation of a high-rate environment and evolving regulatory and accounting requirements for insurers.

Senior investment executives from these Asian life insurance companies have emphasized the appeal of assets like private credit due to their potential to generate diversified global income in the current environment of elevated interest rates.

Courtney Wei, Deputy General Manager of Investment Management at China Life Insurance Overseas, stated that the shift towards fixed-income assets, even within alternative investments, is likely to persist for an extended period. This strategic shift aligns with their long-term asset allocation strategy, driven by expectations of higher interest rates in the coming year.

Wei also pointed out that while supply chain shifts contribute to inflation, the greater driver of inflation on a global scale may be advancements in generative artificial intelligence (AI) technology and its long-term impact on productivity. If these technologies lead to higher economic growth rates, interest rates could remain elevated for an extended duration.

The emphasis on fixed-income assets is further motivated by new regulatory changes, including the risk-based capital (RBC) regulation in Hong Kong and new accounting rules under International Financial Reporting Standards (IFRS) 9 and 17. These reforms have led China Life Overseas to focus on RBC-adjusted returns, favoring fixed income over equities to reduce risk and capital charges.

This shift in strategy also impacts the life insurer’s approach to external asset managers. While they previously favored a hold-to-maturity (HTM) approach, they now require managers who can manage net asset value (NAV) due to increased transparency and NAV-based reporting under the new rules.

Within the realm of private credit, China Life Overseas is particularly interested in first-lien credit while diversifying its investments. They are also considering deploying capital through staged commitments rather than immediate secondary market purchases to ensure they enter the right market vintage.

Manulife Asia, on the other hand, has been diversifying its investments globally, reducing market correlation, and expanding its investments in global public and private debt. They have also shifted away from local equity markets in favor of international equities, private equity, infrastructure, and real estate investments.

Both companies share the perspective of expecting higher interest rates to persist, and they are adjusting their portfolios accordingly. Manulife Asia, in particular, is focusing on longer-duration fixed-income investments to align with their liabilities.

Richard Chan, Chief Investment and Asset-and-Liability-Management (ALM) Officer at FTLife, emphasized the importance of asset-liability duration matching in their investment strategy. He refrains from making interest rate bets and instead bases asset allocation decisions on risk premiums. FTLife’s approach is driven by the potential long-term impact of trends such as generative AI on different asset classes.