Insight
Life Insurers Key Drivers In Region
JAMES DUNN, CONTRIBUTOR, THE AUSTRALIAN FINANCIAL REVIEW | APRIL 2019
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Australian issuers have found a market in Asia as the region seeks high-grade, long duration bonds.
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).
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“It’s the life insurance investor base in north Asia that's the real driver of duration demand.”
Owen Gallimore, head of ANZ Markets Credit Strategy and Research
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The University of Sydney was one Australian issuer for which this new source of demand was right in the sweet spot. Late in 2018, the university was looking to push the envelope on the term of its bond funding, just when the Korean insurers were looking for long duration.
“We're building the kind of infrastructure that lasts 25, 30 years, but the longest-dated bond issue we had done was ten years,” says Laurie Zanella, treasurer at the university. “We were thinking that we’d like to do a 12-year deal, but it became evident that there was an opportunity to do something in that 20 to 30-year space.”
The reason was the Koreans. “The 25-year, $200 million bond (at an indicative yield of 4.5 per cent) that we ultimately did, the investors were predominantly South Korean life companies. We started engaging with them in 2017: various groups of them came to the university and had a look around. We're a high credit rating (Aa1 from Moody’s), so we ticked that box for them.”
Zanella thinks it likely that the demand for long-dated, high-rated Australian credit from those investors will only grow.
“We’ve subsequently been back to visit most of those life insurance companies, earlier this year, and the message we got was that there’s more money there ready to go.”
Wong concurs. “We think that Australia issuers really present a very strong case in particular to these life insurance accounts. What we offer is very strong ratings, very sound governance, and just a very stable general environment, which these life insurance accounts like,” she says.
“They want a very stable country base, very strong in terms of regulation and governance, and away from the domestic market, within Asia their choice really is Singapore and Hong Kong in terms of issuers in the high-grade space. And then in terms of close proximity, is Australia. This growing area of Asian demand has added a lot more colour and diversity to our market,” Wong says.
The life insurers essentially are seeking duration, in investments “they can get their head around,” says Choi. “They see something like Sydney University not only as high-grade and long-duration, but as an infrastructure investment, something they understand really well,” he says.
And as much as the investor base is growing, and assets under management (AUM) is growing, these kinds of investors are “not actually getting the bond issuance they really need for their portfolios,” says Gallimore. He says this will make them keener to look at Australian issuers, which “obviously tick all the boxes for them.”
This article was first published on April 5 2019 in the Australian Financial Review’s Special Report on Rise of Asian Liquidity
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