Asean regulators should liberalise insurance and debt-market rules to develop institutional investment flows within the bloc, argues Michael Manuel,* Manila-based Asia CIO for Canadian insurer Sun Life Financial.
Because many Asean governments, including Malaysia and Indonesia, require most local insurance assets to be backed by their own government bonds, insurers are forced to match most of their liabilities with local assets, he says.
Diverse risk-based capital (RBC) rules also inhibit integration and regional development. Each country follows different methods of charging foreign sovereign bonds under RBC reserves, which prevents Asean developing as a single bond market.
And market pricing of bonds varies, too.
“In the Philippines, our team can’t access Indonesian sovereigns directly. We have to purchase them via local banks,” Manuel notes. “To the Philippine team, Indonesian government bonds are very attractive: for a similar credit rating you can get a 350 basis point spread on the same 20-year bond; it yields 8.5% in Indonesia and 5% in the Philippines. But our Manila team has to go through local counterparties.
“The pricing gap on the same Indonesian bond can be $2 depending on where you buy it. So it’s not just that we need regulators to change things: the market infrastructure must also change if we are to trade bonds on a regional basis.”
Sun Life sell life insurance and mutual funds as well as unit-linked products in Asia. Its total regional AUM is $7.3 billion, managed by local investment units that coordinate with a Hong Kong-based asset-liability management team and Manuel. Of those assets, $4.2 billion is sourced from Hong Kong, $2.5 billion from the Philippines and $600 million from Indonesia.
Manuel works to anticipate global rises in interest rates, as well as to develop a regional capability to invest in private and illiquid assets.
“We don’t have a [property and casualty] business,” says Manuel. “All of our policies are related to long-term life insurance.
"In Hong Kong and the Philippines, we have some large blocks of business that are set to mature over the next two or three years. These represent 15- and 20-year policies written before 2000. In the Philippines we call these closed blocks, and we have one that’s around $750 million that will pay out when it matures.”
But sourcing long-duration assets in the Philippines and Indonesia is problematic.
“Although you can get 25- or 30-year government bonds in the Philippines, there is a limit, and the average duration of our portfolio is 11 years,” says Manuel. “But our local liability average duration is 17 years. It’s hard to close that gap.”
Sun Life tries to use the cross-currency swaps market. It also maintains a portion of its portfolio in back-end coupon payment bonds, which synthetically create a longer-duration bond from a peso perspective.
“Some countries allow you to buy other countries’ sovereign bonds if they are investment grade,” says Manuel. “We can ask the Insurance Commission in the Philippines to buy Indonesian sovereign bonds in dollars and swap those into pesos. Sometimes we can also reshape the coupon profile of such issues.”
The Philippines is more open.
“When we talked to the central bank about this in 2004, the country had only $15 billion in external foreign reserves and the authorities were worried about dollar outflows,” he says. “But today we are getting $2-3 billion of inflows a month thanks to foreign remittances and the BPO [business process outsourcing] industry, and foreign reserves are around $90 billion. Today we have too many dollars and we can execute large cross-currency swaps.”
* A full interview with Michael Manuel appears in the upcoming (June) edition of AsianInvestor.