➤ 98% of rated insurers in Asia-Pacific have a stable outlook.
➤ Capital market volatility will prompt insurers to more actively manage their investments.
➤ IFRS 17 adoption impacted insurers in different ways, with South Korean insurers benefiting from reduced insurance liabilities.
Insurers in Asia-Pacific face increasing uncertainty over earnings due to capital market volatility and its impact on investment portfolio valuations and hedging costs, S&P Global Ratings analysts said during a March 12 webinar.
Persisting volatility in capital markets, plus adjustments to monetary policies, will prompt insurers in the region to more actively manage their asset allocations and investment risks, according to lead analyst Wenwen Chen. Credit stresses, particularly in real estate and alternative investments, could lead insurers to reassess the risk-return balances and become more selective.
Asia-Pacific insurers, except in mainland China, maintained a stable asset mix in recent years. Interest rate hikes in these markets helped insurers manage their asset-liability mismatch as reinvestment returns improved, Chen added.
Insurers in Japan and Taiwan remain exposed to volatile foreign exchange movements due to their high allocation to foreign-currency bonds. Hedging costs for investments in foreign currency will continue to weigh on Japanese life insurers' profitability, which is still expected to be stable in fiscal 2024, underpinned by mortality/morbidity gains.
Lead analyst Patty Wang said Taiwanese life insurers are very susceptible to capital market volatility and foreign exchange movements, as seen in 2022 and 2023. Capitalization for life insurers in Taiwan is still satisfactory, having stabilized following a rebound in valuation of insurers' investment portfolios, but it only provides a "thin buffer" for unexpected external shocks.
Some life insurers whose capitalization are below the regulatory minimum will work closely with the regulator to manage their capital, Wang said.
Higher insurance claims resulting from the rising frequency and intensity of extreme weather events pose more challenges for insurers in the region, impacting earnings for property/casualty reinsurers, while higher reinsurance costs and growing catastrophe budgets erode profits further, according to an S&P Global Ratings analysis.
Japanese insurers to reduce equity holdings
Japanese insurers could reduce their equity allocations as they accelerate sales of their strategic equity holdings, according to Chen. Property and casualty insurers have been selling their strategic holdings for the past 10 years and are expected to further accelerate sales following the Financial Services Agency (FSA)'s issuance of business improvement orders in 2023.
The regulator urged Tokio Marine & Nichido Fire Insurance Co. Ltd., Sompo Japan Insurance Inc., Mitsui Sumitomo Insurance Co. Ltd. and Aioi Nissay Dowa Insurance Co. Ltd. to expedite the divestment of their cross-shareholdings in February as part of the business improvement order issued to the insurers, which face allegations of colluding on premiums for corporate clients, Nikkei Asia reported. The four insurers have a combined ¥6.5 trillion of strategic shareholdings.
Tokio Marine & Nichido Fire Insurance told Nikkei Asia that it is "considering further efforts" to reduce its strategic shareholdings based on recommendations from the business improvement order. Sompo Japan, Mitsui Sumitomo Insurance and Aioi Nissay Dowa said they were still weighing options as they compile improvement plans, according to the report.
Cross-shareholdings help insurers maintain close relationships with their business partners, but the FSA said they distort market competition as companies often choose insurers based on these holdings instead of actual terms, the report said.
Lead analyst Toshiko Sekine said these governance issues are not expected to impact the insurers' ratings as the related premiums equate to a small portion of their business, nor will they weaken the insurers' competitive position and impact their profitability.
Japanese life insurers are also reducing equity investments to prepare for the new economic value-based solvency regime, which will be implemented in fiscal 2025. Sekine said insurers are "quite well prepared" for the regime, having reduced market risks, shifted product strategies and strengthened solvency ratios through hybrid issuances. The FSA has also conducted field tests for more than 10 years in preparation for the new solvency regime, according to Sekine.
Though many insurers consider that they have reached their capital targets under the new solvency regime, a few insurers are likely to raise new capital in 2024, Sekine said.
Chinese insurers' real estate exposure
Rated insurers' exposure to the real estate sector in Mainland China is "not prominent" and corresponds to less than 5% of their invested assets and less than 20% of shareholder equity, according to S&P Global Ratings.
Some small and medium-sized insurers have larger property exposures to the sector and experienced substantial capital and earnings volatility, Chen said. Insurers with concentrated exposure through alternative investments may face further counterparty risks like repayment extensions.
Chinese insurers have significantly reduced or diversified their exposures to state-owned property developers in the past 18 to 24 months, according to Chen. Additionally, Chinese insurers are shifting to direct investments into commercial real estate, though increasing vacancy rates amid slowing demand could weigh on their rental incomes.
Impact of IFRS 17 implementation
Insurers throughout Asia-Pacific and even Europe reported a decline in shareholders equity under IFRS 17, mainly due to the introduction of a contractual service margin criteria and a slower recognition of profits in general under the new accounting regime, according to lead analyst Emily Yi.
"The impact of IFRS 17 adoption can differ from company to company depending on how different their reserving and profit recognition methods were under old accounting rules compared with IFRS 17," Yi said.
The trend in South Korea differed from other markets. South Korean insurers' shareholders equity and reported earnings increased under IFRS 17 due to rising domestic interest rates in the past few years, which led to a decline in insurance liabilities under the new accounting standard.
The accounting change alone is unlikely to trigger rating actions, but financial statements under the new accounting standard provide "enhanced visibility" into how insurers' future profits can support their capitalization, which could lead to rating actions, according to Yi. Changes in the insurers' risk appetite or capitalization strategy following the introduction of IFRS 17 could also lead to rating actions.
