Asia-Pacific insurers turn to emerging market debt for yield

Investment-grade issuance now accounts for more than half of the market.

Asia-Pacific insurers are showing greater interest in emerging market debt as they seek higher yields and assets that attract lower capital charges under tighter regulations.

“It is a confluence of positive factors that led to this,” Alan Koay, senior insurance solutions director at Aberdeen Investments Ltd., said in an emailed reply to questions.

He said tighter capital rules have made emerging market debt more attractive because insurers need to hold less capital against it. The market has also improved in quality, with more than half of outstanding debt now carrying investment-grade ratings.

Emerging market debt exceeded $20t by the end of 2025, according to an Aberdeen white paper published in May.

The market includes about $15.8t in local currency government debt, $2.6t in US dollar corporate debt, and $1.8t in US dollar government debt across almost 80 countries and more than 700 issuers.

Koay said the number of emerging economies issuing debt has grown to more than 70 from 20 in 2000.

“It is factual that insurers are indeed looking for higher yields,” Philip Chung, managing director and sector lead for insurance ratings at S&P Global Ratings, told Insurance Asia.

But that does not mean insurers are automatically increasing exposure to emerging market debt, he pointed out.

“They are picky about where they go,” Chung said via Zoom. “Is it emerging market debt? Not necessarily. It could well be US high yield, for example, but they are searching for better yields.”

He added that some regulators assign lower capital charges to infrastructure debt than to other unrated assets, making infrastructure another attractive option.

Frank Yuen, vice president and senior credit officer at Moody’s Ratings, said insurers might add US dollar emerging market debt for diversification and local-currency bonds to better match long-term liabilities.

However, sovereign bonds remain the preferred choice because of lower credit risk.

“The capital benefits of emerging market debt are not particularly attractive compared with other asset classes,” Yuen said in an emailed reply to questions.

He said insurers show stronger interest in infrastructure for its duration and capital treatment and in private equity for returns and diversification.

Yuen said Hong Kong and Singapore insurers, particularly pan-Asian groups such as AIA Group Ltd., Prudential Plc, and Manulife Financial Corporation are better placed to increase emerging market debt holdings because they already manage large overseas portfolios and match investments more closely with policy liabilities.

Even so, higher government bond yields and conservative risk limits could slow additional allocations.

The International Monetary Fund said foreign investment in emerging market stocks and bonds has climbed steadily since the 2008 global financial crisis, reaching almost $4t by 2025, with bonds accounting for most inflows.

Chung said wider adoption depends less on yield than on market structure.

“[Emerging market debt has] some structural challenges that need to be addressed over the longer term to continue growing,” he said, citing credit risk, regulation, transparency, and liquidity.