Insurers’ life funds post muted returns in 2021; no bonus cuts for now

POLICYHOLDERS of traditional with-profits plans can heave a sigh of relief that their plans’ annual bonuses will not be cut for now, despite a generally muted performance among insurance life funds in 2021.

Based on a compilation by The Business Times, the performance in 2021 among insurers’ participating funds ranged between a high of over 5 per cent and a loss of more than 7 per cent. These returns are lower than the returns of 2020 which were in the high single-digit, and 2019 in double-digits. Prudential’s Singapore-dollar life fund posted returns of 5.13 per cent, just a tad below its 2020 return. AXA’s life fund reported minus 7 per cent in returns. It will not cut bonuses this year.

Restraint on bonus cuts reflects par plans’ “smoothing’‘ mechanism at work. Smoothing means that insurers typically do not distribute all the returns in good years, retaining some surpluses as a cushion for distributions in the years when market returns are lower.

Some insurers, however, have put policyholders on notice that bonuses may be cut should the investment environment and returns remain poor. This may well materialise as the expectation of slower global growth, higher inflation, and higher interest rates have hit valuations of both equity and fixed income assets this year.

Year to date, the MSCI World Index is down by 14.5 per cent and the MSCI All Countries Asia ex-Japan index is down nearly 18 per cent. In the fixed income space, the Bloomberg Global Aggregate Total Return Index is down by 12.85 per cent.

Life insurance funds are mostly invested in fixed income assets, which have suffered marked to market losses this year as interest rates and inflation expectations trend higher. But at the same time, bond investment opportunities are now more attractive given the higher yields now available across the fixed income spectrum, including investment grade and high yield.

Last year, the industry reduced the illustrative rates used for par policy projections. The upper bound of par policies’ projected rate of return was reduced from 4.75 to 4.25 per cent; the lower bound was revised from 3.25 to 3 per cent.

Last year was a strong market for equities. The S&P 500 generated returns of 29 per cent, and the MSCI World Index 19 per cent. The Bloomberg Global Aggregate Bond Index return was minus 1.29 per cent.

With-profits or par plans are those where insurers pool premiums together into the life fund, and policyholders share the investment experience. Par policies have guaranteed and non-guaranteed returns. Annual and terminal bonuses are part of non-guaranteed returns. Once declared and paid, bonuses become guaranteed. While the smoothing mechanism shields policyholders from volatility, a spate of poor returns may still spur reductions in annual and terminal bonuses.

With-profits plans remain a favoured mode of insurance coverage and investment for Singaporeans. As at the first quarter it accounted for 45 per cent or S$548 million of new business premiums.

Prudential, whose life fund generated the highest returns in this compilation for 2021, will raise the terminal bonus (TB) rates of some policies. The TB is an additional amount typically paid on maturity or death.

Andrew Chen, Prudential Singapore’s head of investment, said the strong performance amid challenging market conditions was largely due to “strategic diversification’’ across asset classes and geographies. “While most fixed income assets and emerging market equities underperformed last year, the developed market equities and other investments delivered positive returns, which raised the overall return on investments,” he noted. “Even though the outlook remains uncertain, the current bear market offers opportunities for long-term investors to accumulate investment positions.’’

In its par fund update, AIA said the future outlook of investment returns is a key factor impacting future bonuses. “If investment returns continue to be persistently low going forward it may be necessary to lower estimates of future bonuses and dividends for some blocks of participating businesses accordingly. Our aim is for the long-term cost of smoothing to be broadly neutral across generations of policy owners,” said AIA.

Singlife with Aviva’s group chief investment officer Kim Rosenkilde said that bearish global markets have caused a decline in asset values of Singlife’s life funds. “We are currently re-evaluating our investment strategy to optimise the long-term returns within our risk appetite… If the situation persists, the bonuses of the participating policies may be adversely impacted.’’

The firm is looking into adding exposures to alternative asset classes including private debt, infrastructure and real estate, which are less correlated to traditional assets and may provide inflation protection.

In an unusual move, Tokio Marine has withheld its par fund disclosure and bonus declaration for its 2021 performance, until the end of the year. It pointed to the possibility of stagflation, triggered by geopolitical risks and macroeconomic factors such as higher interest rates and inflation. It said it is re-evaluating its par fund investment strategy “to develop an appropriate medium to long-term approach to provide the best balance between return and risk, taking into consideration the past and current investment performance which might be distorted by the short-term market volatility’’.

On the outlook for 2022, Manulife said it was crucial to be cognisant of downside risks.

Income’s chief investment officer Mark Shi, meanwhile, said that Income has taken on a defensive stance in the first half and continues to maintain a diversified portfolio focused on delivering long-term returns. Peak inflation in the US has likely occurred, but the fall in inflation will be gradual, he noted. “The Fed will continue to hike interest rates, although it will be less hawkish in its monetary policy tightening going forward. In the short term, we continue to be cautious about interest rates. There is rising probability that the US economy will enter a mild recession in 2023.

“Against this backdrop, we are seeing better value in fixed income markets over the medium-term. In the equities markets, higher interest rates are acting as headwind… The market will be increasingly focused on whether earnings could beat expectations, which have been lowered. We expect stock markets to be in a broad trading range and thus, will be adopting a more tactical investment stance with a defensive tilt,” he added.