How CPIC Life seeks to close duration gap
China Pacific Insurance's life arm wants to continue reducing the duration gap between its assets and liabilities with Chinese government bond investments while lifting its overseas exposure through external managers.
Maintaining a duration-lengthening strategy will be a highlight for the life insurance unit in 2019, Benjamin Deng, group chief investment officer of China Pacific Insurance Company (CPIC), told AsianInvestor in an interview.
CPIC Life’s asset duration is about seven years but 17 years on the liabilities side, he said. So to address the mismatch, the insurer will seek to lengthen asset duration through Chinese government bonds, which tend to have longer maturities than corporate bonds.
Bonds with longer maturities can lengthen asset duration, a measurement of interest rate sensitivity that is expressed in number of years. The longer the duration (or years), the more sensitive it is to changes in interest rates. Matching the duration of fixed-income assets and liabilities is important as it can reduce interest rate mismatch risk in asset-liability management (ALM).
CPIC poached Deng from AIA last year to strengthen the Shanghai-based firm's ALM and coordinate strategic initiatives, after ALM rules on insurers were introduced early last year. CPIC, the third largest insurer in China, had total assets of Rmb1.28 trillion ($191 billion) in the whole group at June-2018, its latest interim report shows.
The lifer will likely act quickly to invest in Chinese government bonds as it expects interest rates in China to fall further.
“As a life insurance company we don't trade treasuries (Chinese government bonds) but hold them to maturity. A falling rate is in the long term bad for insurers. As we have the strategy of lengthening duration using treasury bonds, capturing the rates before they fall is optimal,” he said.
Chinese 10-year government bonds were yielding 3.14% on Thursday.
But unlike some of its peers, CPIC is not seeking to cut duration gap by heavily investing into non-standard credit assets. These are more for yield than duration. Moreover, investors also need to be careful about the associated liquidity risks, Deng said.
Bigger peer Ping An Group has said it will likely raise its exposure to infrastructure project debt by buying debt investment products from its fund management subsidiary, as the group looks to lengthen the average duration of its own assets. Ping An’s duration gap was 6.6 years as of June 2018.
China Life, the biggest life insurer in China by assets, also said last year that it planned to increase its investments in non-standard debt in order to lengthen its asset duration.
In addition, Swiss insurer Zurich recently said it was looking to lengthen the overall duration of its fixed income portfolios in Hong Kong.
OVERSEAS INVESTMENTS
CPIC Life will likely increase its overseas exposure too as it can now better manage the currency risks, Deng said.
Currently, CPIC Life’s overseas investments account for less than 1% of its Rmb1 trillion ($149 billion) portfolio. The key question for investing overseas is how to hedge against foreign exchange risks, he said.
Since the second half of 2018, we have seen improvements in the development of hedging tools, like cross-currency swaps. In the past, the dollar-offshore renminbi swap was only available for two years. But now, investors can hedge for as far out as five years.
“So we’ll have more confidence to manage the risk in overseas investment. We’re now in the process of weighing the investment risk and returns,” he said.
To that end, it will look to outsource to managers for making multi-strategy investments in debt, equities and other assets, subject to constraints like duration, volatility and return requirements, he said.
There are no official statistics on insurers’ overseas investments in China. Based on Fitch's observations, the overall exposure to Chinese insurers’ foreign assets is still very low as most insurers are still focused on underwriting insurance business across the country, Terrence Wong, a director in insurance ratings at Fitch Ratings, told AsianInvestor.
The insurance liabilities of most Chinese insurers are still predominantly denominated in renminbi. So from the perspective of asset-liability matching, insurers generally seek to match their renminbi-denominated insurance liabilities with renminbi-denominated investments to minimise currency risk. As a result, most insurers have no large incentive to invest overseas, he said.
That said, for the purpose of asset diversification and yield enhancement, some of the larger life insurers might choose to make overseas investments.
Smaller insurers, on the other hand, might find it expensive to manage currency volatility, Wong said.
For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.