HSBC Insurance’s Hong Kong unit remains very interested in alternative investments because as a long-term investor it is ideally suited to them, its chief investment officer has said.

Speaking to AsianInvestor last month, William Chan said alternatives not only helped an insurer to match its liabilities but could be particularly rewarding too for the most patient investors.

“Given the very long term nature of our liabilities, we are particularly keen and well-positioned to take advantage of the illiquidity premium embedded in some of these alternative investment assets,” he said.

Chan declined to comment on the insurer's current allocation to alternatives or how much it would rise but did say that the insurer had in recent years been looking at private debt, commercial real estate loans, bank loans and infrastructure debt. 

“We have added exposure to some of these assets,” he told AsianInvestor. “[And] we will continue to look closely in this space and increase the holding of alternative investment assets when we see opportunities.”

He added that private debt and infrastructure (both debt and equity) were becoming of particular interest. The former provides an "efficient return on capital” and so too does the latter due to relatively favourable economic capital charges both enjoy (see box). 

EXPLAINER: ECONOMIC CAPITAL AND CAPITAL CHARGE 

  • Economic capital attempts to measure capital requirement for insurers based on the most realistic assessment of future economic risks that the company faces, according to the Society of Actuaries.

  • Under Solvency II, an EU-wide legislative regulatory regime implemented from 2016, each asset class is assigned a capital charge or capital requirement.

  • An asset’s returns need to be assessed against the capital charge to see if it offers an attractive return on risk capital compared with other potential investments.

Although actual infrastructure investments in the region remain relatively limited, there is a growing buzz around the asset class, partly due to China's Belt & Road Initiative.

In a bid to help plug the region's huge infrastructure gap, the Asian Development Bank said at an Insurance Investment Forum hosted by AsianInvestor last month that it plans to launch a co-investment/lending platform in conjunction with institutional investors.

The world's largest pension fund, Japan's Government Pension Investment Fund (GPIF), also recently awarded its first-ever infrastructure fund-of-funds mandate, and is likely to encourage more pension funds to consider investing in infrastructure, AsianInvestor reported.

However, many insurance firms still don't have the requisite in-house expertise and finding suitable partners with the right expertise in infra investing is a challenge, Bruce T Porteous, investment director for global insurance solutions at Aberdeen Standard Investments, told AsianInvestor.

ALTS APPEAL

Alternative credit including private debt also continues to generate strong demand from institutional investors, the latest being Japan’s Kewpie pension fund, which last month told AsianInvestor that it wanted to lift its overall alts allocation to 15% from 10%, with broadly 70% of that in debt. 

For insurers, the alts appeal is even higher because many alternative credit instruments offer attractive returns on economic capital and lower capital charges, Chan said.

The implementation of new capital rules across much of Asia's life insurance industry is expected to encourage insurers to invest more into alternative credit strategies. So too could the higher potential rewards on offer. According to him, returns on alternative credit are typically 50 to 300 basis points above what is offered on more mainstream corporate fixed income.

But capturing this illiquidity premium requires patience since alternative investments typically have longer holding periods (which can extend up to eight years or more) and there is usually little flexibility for an early exit.

Chan did not provide a detailed breakdown of HSBC Insurance's overall asset allocation but said the asset allocation mix differed across portfolios supporting different product lines.

For investment portfolios supporting longer-dated policies or products, the asset mix tends to contain a higher proportion of growth assets such as listed equities, he said, whilst those backing shorter-dated policies tend to have a higher proportion of safe assets including fixed income investments with high credit ratings.

Global assets under HSBC's insurance business totalled $108 billion in 2017; Asia accounts for $73 billion, according to the group's 2017 annual report and investor presentations.

Annualised new business premiums in Asia totalled $2.4 billion in 2017, up 8% from 2016, the annual report showed.