As the Asian bond markets have matured on the back of regionally generated wealth, one of the most influential pools of capital that has become available to Australian bond issuers is the life insurance sector.
Following the Japanese template, life insurers in China, South Korea and Taiwan have also emerged as must-visit roadshow audiences for Australian issuers.
“We tend to talk a lot about China and what that investor base is doing, but really, it's the life insurance investor base in north Asia that's the real driver of duration demand,” says Owen Gallimore, head of ANZ Markets Credit Strategy and Research.
Japan was the obvious example for other markets to follow, says Jimmy Choi, head of capital markets, global, at ANZ.
“Japan has always been a good market for high-grade, long duration money, that likes buying external, particularly Australia. But now you have Taiwan, the Formosa market, which in itself has become a big market for long-duration issues: that is bank money, but also ‘lifer’ money.
''Then there is Korea, which again, that’s long-duration money, life insurance money as well.”
Demand from Korean life insurers came into the market strongly in 2018, driven primarily by regulation, says Jocelyn Wong, director, debt syndicate Australia, at ANZ.
“Life insurance is a very big industry in Korea, and what drove them to be a major new entrant into our market was the regulatory requirement effectively to boost their duration,” she says.
“The average portfolio durations were around seven to eight years, but they've been asked to extend that by around four years in general; they have been basically in a rush to try to add duration into their portfolio.”
In June 2017, South Korea’s Financial Supervisory Service (FSS) brought out a new set of regulations that made it easier for the country’s life insurers to buy offshore assets, recognising that IFRS 9, the International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) in 2014 had made it tougher to hold domestic structured products, and enhanced the relative attraction of long-duration foreign bonds.
The FSS extended the maximum duration allowed for insurers from 20 to 25 years in 2017, and stretched it further to 30 years at the end of 2018. The FSS also let insurers count the duration of foreign holdings against their liabilities without costly currency hedging.
Legislation is pending to remove a 30 per cent foreign cap on insurers’ assets: market expectations are that Korean life insurers’ overseas assets could more than double by 2022, to US$280 billion ($394 billion).