Yield-Hungry Aussie Insurers Warned Not to Take on Too Much Risk

  • Insurers need to adjust expectations, APRA’s Summerhayes says
  • Cautions against material shift towards sub-grade investments

An Australian regulator warned insurers not to plow too much money into riskier investments in a bid to make up for low yields on safer securities.

Geoff Summerhayes, a member of the Australian Prudential Regulation Authority’s executive group, said that “investment returns are not what they used to be” and insurance companies need to “adjust” their expectations to an environment of depressed interest rates.

Insurers, traditionally among the nation’s most conservative investors, have seen their profits eroded as unprecedented monetary easing around the world has driven down the yields on bonds, a mainstay of their portfolios. The yield on Australia’s benchmark three-year note was at 1.62 percent as of 4:15 p.m. on Wednesday in Sydney, compared with an average of 3.84 percent over the past decade.

“What we don’t want to see though is a material shift towards sub-grade investments to chase yield,” he said Wednesday at a conference in Canberra. “To date, we’ve only seen small movements in this area. While our capital rules capture higher-risk investments, insurers need to take care not to adjust their investment portfolios outside of their risk appetite and without due consideration to the risk-return trade off.”

His warning comes after Australia’s general insurers saw their combined total return on investments plunge 47 percent to A$2.2 billion ($1.7 billion) last year, according to a report from Fitch Ratings. The credit assessor said companies such as Suncorp Group Ltd. and Insurance Australia Group Ltd. may be tempted to put more money into riskier assets such as equities, while QBE Insurance Group Ltd. said last month that it’s been taking on more credit exposure.