With a unified Republican government, Trump’s policies are expected to drive higher nominal growth, increased inflation, and potentially elevated interest rates. These factors necessitate a strategic and adaptive investment approach for insurance companies to navigate the evolving market conditions effectively.

1. Embrace fixed income opportunities amid steepening yield curve

On the short-end of the yield curve, the pace of rate cuts by the Federal Reserve is expected to be slower. Nevertheless, the downward trend seems inevitable. On the long-end, however, the yields are likely to be driven to a higher level by increased debt issuance, term premia and inflationary pressures. This prospect might benefit life insurance companies, as the steepening yield curve would improve their capital position -- given asset durations are often shorter than liability durations. Insurers, particularly the general insurance companies, may face challenges from their short-end investments. When money market funds’ returns are diminishing, they should explore short-term enhanced return strategies, or fund financing, to sustain a satisfactory yield level. In a world such as today, with positive technicals (strong fixed income demand) and relatively stable fundamentals, there is an argument that high yield bonds are actually more stable as they are: a) short-duration; and b) high carry. This is something that insurers may want to explore to enhance front-end returns.

2. Mindful of the credit spread

The comparison of Moody's Baa corporate bond yields to the yield on 10-year Treasurys suggests that credit spreads are likely to widen. In such an environment, clients need to be even more aware of fundamentals and not price bonds just on ratings. As an example, we are seeing increasing low quality new investment grade issuance, which are underperforming. Clients need to be well-resourced to be able to differentiate credit risk. Mitigating the impact of spread widening on Asian insurers' investment portfolios is challenging due to the limited availability of tools and/or the high basis risk of hedging. Insurers in Singapore, Hong Kong and Korea could benefit from utilising matching adjustments — a natural tool for hedging against credit spread widening, which also provides capital relief — to mitigate impacts. To maximise the advantages of matching adjustments, it is advisable for these insurers to adopt an optimisation-oriented approach, rather than merely focusing on compliance. By strategically optimising matching adjustments, insurers can enhance their financial resilience and risk management effectiveness, fully leveraging the benefits of this powerful financial tool.

3. Diversify across asset classes

Given the potential for increased market volatility and uncertainty, diversification remains a cornerstone of a robust investment strategy. Having a broad opportunity set within fixed income, for example, means one can benefit from pricing nuances between different jurisdictions (e.g. Australian dollar bonds hedged to Singapore dollars can provide yield pickup without taking on more credit risk). In addition, insurance companies should look beyond traditional fixed income and equity investments to include alternative assets such as real estate, infrastructure and private debt. These asset classes can offer uncorrelated returns and act as a hedge against inflation, thereby enhancing portfolio resilience.

4. Leverage equities with growth potential

The equity market is likely to experience mixed impacts from Trump’s policies. While tax cuts and deregulation could boost corporate earnings and support equity prices, higher interest rates and inflation might weigh on valuations. Insurance companies should focus on equities with strong growth potential, particularly in sectors poised to benefit from fiscal stimulus and deregulation -- such as technology, healthcare, and manufacturing. Active management and selective stock picking will be crucial in identifying companies with robust fundamentals and growth prospects.

5. Monitor regulatory changes and policy shifts

Trump’s administration is expected to pursue significant regulatory changes, including potential cuts to funding for regulatory agencies and shifts in trade policies. In addition, in the Asia Pacific region, risk-based capital regimes continue to evolve. For example, Malaysia is conducting its second Quantitative Impact Study (QIS 2) on its risk based capital regime. Hong Kong and Singapore are studying the possibility of capital relief measures for infrastructure investments. Insurance companies must stay vigilant and adapt their investment strategies in response to these changes.

Conclusion

As 2025 unfolds, insurance companies must navigate a complex and dynamic investment landscape shaped by significant macroeconomic and policy shifts. By embracing a diversified and adaptive investment strategy, focusing on inflation protection and leveraging robust asset-liability management frameworks, insurers can position themselves to achieve sustainable growth and financial stability. Proactive risk management and a keen eye on regulatory changes will be crucial in steering through the uncertainties and capitalising on the opportunities that lie ahead.

The article was first published in Asian Insurance Review.