Asia insurers get tactical amid industry squeeze

Insurers in the region are eyeing more tactical asset allocation and increasingly using ETFs to that end, finds BlackRock research. They are also targeting illiquids, above all private equity.
Asia insurers get tactical amid industry squeeze

Insurance companies across the board are worried about persistently low interest rates, but those in Asia Pacific are even more concerned about asset price volatility. This helps explain why they – more than their peers elsewhere – plan to cut their equity allocations, buy more private-market assets and increase their use of tactical asset allocation, according to BlackRock’s fifth annual global report on insurers’ investment strategies.

Ultimately, noted the paper, insurers globally “face a mighty squeeze: many traditional investment assets no longer meet their needs, while the alternatives bring a range of issues including a chronic shortage of supply and issues with implementation”.

The US fund house, in conjunction with the Economist Intelligence Unit, surveyed 315 executives from insurance firms worldwide with an estimated $12 trillion under management. Nearly a fifth of respondents (18%) were from Asia Pacific.

AsianInvestor spoke to David Lomas, global head of the firm’s insurance asset management business, about the Asia-Pacific findings against a backdrop of geopolitical uncertainty, depressed bond yields and weak economic growth.

Raising investment risk

Given the low-return environment, the vast bulk of insurers in Asia Pacific – like their peers elsewhere – aim to maintain or increase their level of investment risk with a view to boosting returns. Only 7% of respondents in the region – and 8% globally – plan to reduce their investment risk over the next 12-24 months. That compares to 49% in Asia that intend to increase it (and 47% globally). 

Insurers in different regions are taking different approaches to doing this. For instance, four in 10 in Asia say they will make more use of tactical asset allocation (TAA) to boost portfolio efficiency, compared to 23% globally.

In Asia Pacific, an increasingly popular way of gaining short-term exposure is through exchange-traded funds (ETFs), said Lomas. BlackRock is seeing a significant increase in insurers in the region using ETFs for equity and fixed income allocation, he noted. 

“Everyone’s interested in using ETFs now for TAA and derivatives replacement,” added Lomas. “It’s cheap, easy, it’s a single line; they can be in and out very quickly without having to buy securities, set up custody accounts and all the complications that come with that.”

Listed stocks out of favour

Interestingly, however, insurers in Asia-Pacific are far less keen on equities than their peers elsewhere. A net 36% of them aim to reduce their equity exposure, compared to 4% globally. Lomas said this was because Asian insurers didn’t like the big earnings volatility from stocks.

Instead, he noted, they are buying more investment-grade and high-yield bonds and illiquid alternatives, such as private equity, real estate, infrastructure equity and debt. 

Private equity is out-and-out the most popular choice among private-market assets among Asia-Pacific insurance firms, with 56% looking to boost their PE allocations. That compares to 53% in Europe and 40% in the US.

These assets offer an illiquidity premium and tend to exhibit lower market volatility because they are private, noted Lomas.

However, there are concerns about sourcing illiquid assets, with 40% of Asian insurers concerned about access to supply, compared to 33% globally. And if they do get access to such investments, they then face the challenge of how to manage them, noted Lomas (click on graph, left).  

Meanwhile, Asia-Pacific insurers are keeping more cash on hand to help fund illiquid investments without incurring significant transaction costs and to be able to move quickly, noted Lomas. “This was a surprising finding.” 

In Asia Pacific and globally, 50% of insurers are increasing their allocation to cash. But cash exposures are not rising drastically in Asia, he said. “In Asia Pacific, they are moving from 3% or 4% up to 5% [cash allocations], not from 5% to 10%.”

Another reason for holding more cash is that they are increasing their use of derivatives, he noted. A quarter of Asian insurers plan to do that, and 62% of those say they will do so for tactical purposes.

New sources of return

In addition to a growing focus on illiquid assets and tactical investing, insurers are looking to new approaches, such as volatility control, multi-asset, factor strategies and impact/ESG investing.

In terms of which new areas they were investigating, Asia-Pacific respondents were less focused on volatility-controlled and ‘big data’-driven investing than those elsewhere, but in line with the global response on the other trends (click on figure to the left).

The investment heads of Asia’s largest insurance firms are joining AsianInvestor’s Insurance Investment Form in Hong Kong on February 28. For further information click here.  

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