Diversifying in the quest for yield

CTBC Life was previously MetLife Taiwan Insurance Company. It was renamed CTBC Life in 2011 after being acquired by CTBC group (itself formerly known as Chinatrust).

Earlier this year, CTBC Life acquired Manulife Taiwan, bringing its total of assets under management to $8.5 billion. But that is just the beginning, suggests chief investment officer Chao Weitzu. He notes thta CTBC Life is in the process of merging with the far-larger Taiwan Life. If the deal is completed next year it will create a business with $25 billion in assets, which would be the sixth biggest in Taiwan.

Q What’s the main difference between Asian and Western insurers when it comes to asset-liability management?

A The products offered by Asian insurers are not similar to those in Western countries. In Taiwan, a significant part of insurance products are ‘saving’ products. The profit margin is not very high and insurers face high pressure to generate returns on investment, as we have to compete with fund management companies. In many foreign countries, investment products have longer horizons, while in Taiwan insurance policies with only six or seven-year maturities are common.

Q Given low interest rates, how do you match assets to liabilities?

A Approximately $3 billion of our insurance policies are legacy liabilities from MetLife Taiwan, which were sold at a time when interest rates were much higher. The policies we have issued in more recent years have promised much lower returns, and as our asset base grows, it has diluted our liability cost to below 4%.

Liability cost refers to the rate of policy reserve. If assets return above the policy reserve, we don’t suffer loss from the difference in rates. In the coming one or two years, our funding cost should decrease by another 20-30 basis points.

To help manage our liabilities, we sell investment-linked products. On the investment side, we are increasing exposure to equities to increase returns. Manulife Taiwan’s major product is investment-linked products, so we hope this new acquisition will further improve the balance of our policy products.

Q What are the challenges for ALM at the moment?

A The interest rate is too low and Taiwan’s [investment] market is too shallow. We find the return for Taiwan’s onshore investment products are not good. The only asset with upside is equities, but the volatility is too high for us – insurers seek long-term stable returns, after all.

So we cannot heavily invest in equities. Therefore, we try to invest more in overseas markets. We can invest up to 50% of our assets into overseas markets under the current regulations.

Q What is your asset allocation?

A As of 2013, we have allocated 17% to short-term investments with a maturity of less than one year, such as cash and deposits. We also have 62% in fixed income investments, 14% in equities, 6% in loans and 1% in domestic real estate. Geographically, 44% of assets are in overseas markets and 56% are in our domestic market.

Q Are you looking to increase your exposure to international markets?

A We have increased our exposure to overseas markets from 40% in 2011 to 44% as of 2013. We target an increase of our exposure to 48% this year. In our existing portfolio, over 80% [of international investments] are in fixed income, including government bonds, corporate debt and financial sector bonds.

This year, we will further diversify our debt exposure into emerging markets, including sovereigns, and we will also select some corporate debentures. China is the market we are most interested in. We will access China’s bond market via our $100 million QFII quota.

Q How do you go about accessing international equity markets?

A We use ETFs [exchange-traded funds] to time markets. We seldom hold them for the long term, so liquidity is important to us. We invest in European and US exchange-traded funds because of the time-zone difference. In markets in which we are more familiar, such as Taiwan, Hong Kong and China, we pick stocks ourselves and use ETFs to hedge. I expect we will increase our exposure to ETFs by 1-2% this year.

Q How do you allocate your portfolio in developed market?

A MetLife Taiwan was an US-owned insurer, so when we acquired it two years ago we had 90% of our bond exposures to the US. Manulife Taiwan also has significant exposure to US debt. Considering the country risk, we are now trying to decrease our US exposure.

The exposure has been lowered to 80% now. We will continue to reallocate the US investment to Europe, Asia and even Latin America.  We do not have a specific target at the moment but we will continue the diversification this year.

Q Will you consider hiring an external manager when you enter these markets?

A We would consider that for markets in which we don’t have the in-house expertise to cover it. But that process takes a long time. Mandates depend more on asset class than on geography. For example, we are interested in overseas real estate.

When we are stepping into this investment, we may consider hiring a company to help us find suitable projects and manage them for us. After all, we just seek stable rental yields. We will probably wait until we have completed the acquisition of Manulife Taiwan before we consider new asset classes.

Q How far down the credit curve do you invest?

A We invest in bonds that are investment grade, rated at least BBB-. Regulation allows us to invest in some bonds with a rating of BB+. However, the list [of approved securities] is limited in terms of the number of eligible companies, so we will not consider investing in the non-investment grade bond at the moment.

Q Many Asia-based insurers tell AsianInvestor they are increasing their exposure to alternatives. Will you?

A We do not have exposure in private equity investment at present. However, we plan to allocate 1-2% to private equity this year and are now doing due diligence. We would like to invest in private equity funds in developed markets with shorter investment horizons, says three years.

We are seeking secondary private equity funds so we can waive the initial investment period and get returns sooner. We are insurers so we have to consider generating stable income to match our liability.

We will also consider investing in real estate in the domestic market. We currently have 1% exposure in physical property investment. We target to increase it to 3-5% by this year.

Q Do you outsource mandates to external fund managers?

A We run all the investing in-house. When we consider issuing a discretionary mandate, we hope the managers understand the business nature of a life insurer, namely that we have a liability. Any third-party investment must comply with government regulations as well as our internal guidelines.

This is a quite complicated process. It is not very easy to find someone who fits all our criteria and can deliver satisfactory return.

Q How do you select investment funds?

A We use third-party mutual funds to complement those asset classes which we cannot access directly, such as commodities and junk bonds.

Currently, third-party funds account for approximately 5% of our total AUM. Under regulation we cannot invest in non-investment-grade bonds, but we can invest in high-yield bond funds which can offer higher yield than investment grade bonds and also offer liquidity if we want to sell. 

Q Would you invest in commodities to hedge inflation risk?

A We cannot directly invest in physical commodities under current regulation, but we can access commodities via mutual funds, equities or exchange-traded funds. We have not invested in commodity-related investment products at present, but we will start to look into using ETFs for some trading strategies.