Insurers playing it safe with alternatives
Allocations to alternative investments by insurance firms in Asia are expected to remain steady in the near term, despite a much-publicised growing need to match liabilities with higher-yielding assets.
Malaysia’s Etiqa, the insurance unit of Maybank, began looking at alternatives about five years ago, says Hoe Cheah-Kit, head of product and alternative investments, during a panel at yesterday’s AsianInvestor Insurance Investment Forum in Hong Kong.
“We can do up to 5% of our portfolio in this space at this moment,” says Hoe. “We are probably about halfway [to the maxiumum].”
Etiqa, one of Malaysia’s largest insurers with RM24 billion ($7.3 billion) in assets, has examined opportunities in private equity. But the associated risk-based capital charge of 25% that insurers incur from a PE allocation needs to be taken into consideration, says Hoe. That compares to a 16% capital charge for property, where the firm already has domestic investments.
“We have yet to identity a very nice, promising private equity [opportunity]” that will outweigh the capital charge Etiqa would need to pay, says Hoe.
In China, meanwhile, a combination of regulation and onshore bond yields have kept insurers' alternative allocations low.
With renminbi government bond yields averaging about 4.45% for five-year paper, “it’s very difficult to see the need to actually enhance your return profile of your portfolio by diving into alternative investments”, says Martin Tornberg, head of strategic development and investment at Shenzhen-based Ping An Insurance.
“On the other hand, we don’t have much of an alternatives programme, and one of the reasons is regulatory,” says Tornberg. “It’s only in the last few years that the regulator has opened up for these asset classes in a significant manner.”
Last week, the China Insurance Regulatory Commission (CIRC) raised the limit for alternative allocations. Real estate is now allowed to be 30% of an insurer's portfolio, up from 20%, and alternative financial investments can be 25%, a rise from 10%.
However, Tornberg notes, Ping An is "still very much in the early stages, and alternative investments don’t really play a role yet in the allocation decisions of Chinese insurance companies".
The firm has followed the lead of state-owned insurers, which have conservative investment strategies. However, given that Ping An – China’s second largest insurer – has never been state-owned, it is viewed as somewhat of a canary in the coalmine by the CIRC.
“We have a very good relationship with the regulator where they tend to ask us do things first, and then if it works, that’s great for everybody, and if not, then at least it wasn’t the state-owned companies that did it first,” says Tornberg.
Ping An made its first overseas real estate investment in July last year, paying £260 million ($432 million) for London’s Lloyd’s Building. More property deals may be in store.
“We need to look for high-risk, high-return assets outside of China,” says Tornberg. “Within that, real estate is certainly going to be one.” Investments in commodities, resources and infrastructure will also be considered.
Panelists say fixed income instruments have been viewed favourably on a risk-adjusted basis, although they acknowledge a need to diversify – albeit gradually – more into higher-yielding alternative assets.
The average allocation to alts by insurance companies in the West has been consistent over the past several years at 4% of total assets, notes Michael Petrick, New York-based head of global market strategies at PE firm Carlyle Group.
He cites opportunities in strategies that “are under-represented in the marketplace”. They include the financing of energy projects with terms that enable investors to share in the income produced through the underlying assets, such as oil and gas generation.
More unique investment assets will come into the financial system as regulations force banks to part with riskier assets, Petrick predicts.
“You’re going to see a proliferation of products which allow investors to get exposures to assets that would have been held in banks’ books. That could be everything from slicing up a leveraged loan into different risk components, to outright selling [of loans],” he says. “Ultimately that will lead to investment opportunities.”