Chinese insurers eye alternatives: Towers Watson

Free to invest abroad in a range of asset classes but slow to do so, Chinese insurers are starting to turn to alternatives, said Richard Tan, head of private markets for Asia at Towers Watson.

There has been a rise in the number of inquiries from such firms about alternatives, and “some have pulled the trigger and have made, or are very close to making, commitments”, he told AsianInvestor following the publication of Towers Watson’s global alternatives survey this week. This marks an expansion in the range of assets Chinese insurers have been showing interest in.

“Understandably the range of Chinese insurance companies is quite large,” Tan says. “We’ve had the good fortune to be in discussions with quite a number of them.”

As most of their portfolios are invested onshore, many Chinese insurers are focused on diversification. “For that reason, a few have actively sought to look at alternatives more broadly,” he added.

It’s interesting that some are already looking at infrastructure, notes Tan, given that the usual progression would be to start with private equity, then move to property and then infrastructure.

The asset class is of interest due to its income-generation and inflation-protection potential, he adds. Furthermore, with its sub-categories, such as core or core-plus, infrastructure offers insurers flexibility to meet their liabilities, whether producing income or maximising returns in the case of opportunistic infrastructure, he notes. And “right now there’s a number of attractive infrastructure opportunities in the market”.

However, some mainland insurers have cited certain challenges they face moving into alternatives.

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”, said Martin Tornberg, head of strategic development and investment at Shenzhen-based Ping An Insurance.

The firm 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", he said, speaking at AsianInvestor's Insurance Investment Forum in February.

In October 2012, the China Insurance Regulatory Commission had relaxed restrictions on domestic insurers investing overseas, allowing investments in 45 countries – 20 of them in Asia – and widening the permitted asset classes from equities and bonds to include infrastructure projects and real estate.

Some 40% of the mandates so far issued by Chinese insurers have been for multi-asset strategies, estimates Eric Poon, regional head of institutional business for Asia at 
UK fund house Baring Asset Management. Many of the rest were for US, Hong Kong or global equity strategies, he added.

But the potential for growth in alternative investments by insurers is huge. Asian insurers are forecast to boost investment in real estate to $205 billion by 2018 from $130 billion last year, said property services firm CBRE in a recent report. Some $30 billion of that increase could be into overseas real estate, it added.

Between 2008 and 2013, insurance assets in China posted growth of over 20%, with growth of 65% between 2008 and 2013. And insurers in China have increased their property investment most of all in Asia, quadrupling it to $1.9 billion as of last year from $468 million in 2008, noted CBRE.

Meanwhile, in general, Asia-Pacific institutions’ interest in alternative asset classes closely resembles global appetites, according to the Towers Watson survey.

Of the top 100 alternative investment firms globally, real estate managers have the largest share of assets (31% or more than $1 trillion), followed by private equity managers (23% and $753 billion), hedge funds (22% and $724 billion), private equity funds of funds (10% and $322 billion), funds of hedge funds (5% and $173 billion), infrastructure (4% and $121 billion) and commodities (2% and ($79 billion), a report into the survey findings says.

“If you look at the global situation in terms of where interest rates are, there is general sense that in Asia Pacific, investors are looking towards the more riskier side of the return spectrum. And that fits well into the potential of what alternatives offer,” says Tan. “For that reason private equity has been an area of increasing focus in this part of the world, as have real estate and infrastructure.”

Another recent regional development is that investors are becoming more interested in separate accounts, says Tan, with one likely reason for this being the desire to have greater control over how investments are made. Investments could then be tailored to screen out, for example, specific country exposure.

“We are helping clients interested in separate accounts to figure out the most efficient modes of implementation. Often fund managers will raise a comingled fund in parallel with the separate account. We are supporting clients to look more closely at potential conflicts that may arise from that.”