A.M. Best Special Report: Changing Asset Management Trends – The Quest for Better Yields

SINGAPORE--()--Assets held by insurance companies have expanded substantially in the Asia-Pacific region, most notably in Japan and China, supported by continuing revenue growth across the region, according to a recent special report by A.M. Best. Total investable assets are estimated to grow substantially in the Asia-Pacific region, driven by robust life insurance business, particularly in big emerging markets like China.

The Best Special Report, titled, “Changing Asset Management Trends – The Quest For Better Yields,” states that insurance companies, armed with these expanded assets, are looking beyond their conventional asset investment strategies in a bid for better returns and profits for sustainable growth. Japan’s total assets for life and non-life industries amounted to 367.3 trillion yen (USD 3 trillion) and 30.96 trillion yen (USD 255.5 billion), respectively, in the 2014 fiscal year. Total assets of China’s insurance industry doubled to 10.2 trillion yuan (USD 1.6 trillion) from 2010 to 2014.

In the first half of 2015, investment income for China’s insurance sector more than doubled to 510.5 billion yuan, with an average yield of 5.16%, as a stock market rally supported investment. However, between the end of June and the end of August, the Shanghai Composite Index plunged more than 25%. These market fluctuations will likely have a material impact on financial results in second-half 2015.

Quantitative easing in Japan has dragged down government bond yields on already low-yielding Japanese government bonds, which has challenged Japanese insurers. Investment income accounts for the majority of overall profits for Japanese insurers. In fiscal-year 2014, the 10-year Japanese government bond yields dropped about 38%. However, the stimulus policies have pushed stock prices to higher levels and have depreciated the yen against the dollar, which led to a substantial improvement in insurers’ investment income and partly contributed to higher net income in the insurance sector in the past year.

The state of the global economy, regulation, national policy and company strategies have all impacted investment decisions. In addition, the financial vulnerability of sovereign bonds makes them no longer risk-free investment options. In developing financial markets like China, insurers trend to be more prone to uncertain risk prospects on new investment channels and volatile domestic stock markets. By contrast, for insurers in Japan, they seem to be better developed with strategic shifts in asset allocation; however, they have to be mindful of large liability denominated in local currency.

Overall, A.M. Best sees diversification as helping companies to reduce volatility in earnings, as well as a capitalization tool for alleviating concentration risk. With evolving trends, A.M. Best believes strong enterprise risk management is critical to ensure a successful outcome of a shifting strategy over time. One primary consideration is to what extent a company’s risk appetite can withstand or have control over financial events, such as China’s recent stock market plunge and the doubtful consequences of Japan’s economic stimulus policies. Risk considerations include not just asset-class risk but also wider economic and political environments, as well as added volatility from an induced duration gap resulting from moving out of certain conventional invested portfolios.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=243287.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Co.
Moungmo Lee
Managing Director,
Analytics - Singapore
+(65) 6589 8412, ext. 210

moungmo.lee@ambest.com
or
Iris Lai
Hong Kong Bureau Manager
+852-2827-3415, ext. 415

iris.lai@ambest.com
or
Christopher Sharkey
Manager, Public Relations
+(1) 908 439 2200, ext. 5159

christopher.sharkey@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
+(1) 908 439 2200, ext. 5644

james.peavy@ambest.com

Contacts

A.M. Best Co.
Moungmo Lee
Managing Director,
Analytics - Singapore
+(65) 6589 8412, ext. 210

moungmo.lee@ambest.com
or
Iris Lai
Hong Kong Bureau Manager
+852-2827-3415, ext. 415

iris.lai@ambest.com
or
Christopher Sharkey
Manager, Public Relations
+(1) 908 439 2200, ext. 5159

christopher.sharkey@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
+(1) 908 439 2200, ext. 5644

james.peavy@ambest.com