Rising rates seen boosting insurance shares
Insurance stocks are a good investment choice at a time of rising interest rates, analysts say, as the upward long-term yield curve lends support to the investment portfolios of insurance firms.
Most global bourses tend to decline when interest rates rise because rising rates indicate higher financing costs. But the banking and insurance sectors are two exceptions riding the wave of higher interest rates.
Pornthep Jubandhu, senior vice-president of SCB Securities, said stocks related to insurance are one of the more attractive investment classes because the companies stand to reap the benefits from investment in long-term yields.
“The Thai government bond yield could rise in the near future, driven by an increase in headline inflation and as oil prices continue to climb,” Mr Pornthep said.
He said the key driver of higher inflation is likely from the supply side rather than the demand side.
At present, the 10-year Thai government bond yield is 2.85%, while the 10-year US treasury yield stood at 2.93% as of Monday. Thai and US government bond yields normally move in tandem with one another.
The interest rate normally does not exceed nominal GDP growth, which is not adjusted for inflation, Mr Pornthep said.
Since the US’s nominal GDP growth is around 4%, there is room for interest rate hikes of 2.5-3%, he said. If this happens, the US bond yield will rise to 4%, in line with nominal GDP growth of the world’s largest economy.
For Thailand, where the current policy interest rate is 1.5%, interest rate normalisation will depend on economic conditions, Mr Pornthep said.
“Insurance stocks will remain interesting for a year because of this reason,” he said. “However, investors must consider external factors such as geopolitical risks and the fundamental factors of each stock.”
Life insurance premiums are expected to grow by 4-6% from last year’s total premiums worth 601.72 billion baht, according to the Thai Life Assurance Association.
On the other hand, non-life premiums are expected to grow by 3.5-4%, valued between 2.26 billion and 2.28 billion baht, according to the Office of Insurance Commission.
Insurance business growth is supported by the continuous economic recovery, while growth in non-life insurance is to be propelled by industrial all-risk insurance policies to cover infrastructure megaprojects.
Usanee Liurut, executive vice-president of Asia Plus Securities (ASP), said insurance companies’ operating results are expected to recover this quarter, driven by Thaire Life Assurance’s non-conventional products developed with business partners. These include ordinary life, credit life and mortgage life.
The contribution of non-conventional product revenue in the first quarter was 66%, up from 40% in 2017 and 2016, according to ASP.
For the first quarter, ASP collated the operating results of 16 SET-listed insurance companies. Those firms recorded a combined net profit of 3.1 billion baht, up 2.1% quarter-to-quarter and 13.5% year-on-year.