Volatile equity markets, the prospect of rising US interest rates, slowing global growth. Add Brexit and the ongoing trade war between China and the US to the mix, and it’s easy to see why investors have much to worry about.
So it's no surprise that avoiding excessive risk in such uncertain times and ensuring that appropriate asset-liability management (ALM) mechanisms are in place were among the main topics of discussion among chief investment officers of some of the region’s leading insurance firms attending AsianInvestor's 6th Insurance Investment Forum in Hong Kong.
"The biggest priority that we have in the team is to ensure that we converge to the SAA [strategic asset allocation] because we started diversification, two or three years ago, into quite a number of [asset] classes,” William Chan, HSBC Life's CIO for Hong Kong, told delegates at the event on Tuesday.
With markets now well into the late stages of the global credit and economic cycle, risk premia across asset classes are rising. In such an environment, focusing on ALM and portfolio diversification have become particularly important, he said.
“If we ensure that our assets and liabilities are closely matched, it will allow us to go through the cycle without any issue,” he noted. The last thing an insurer needs is to discover it is suddenly saddled with too much risk, or has a mismatch of risk in some asset classes, forcing the firm to make an asset sale to mitigate such risk.
That sentiment was echoed by Boris Moutier, CIO for Axa Hong Kong and Asia. He said that apart from ensuring that assets were appropriately matched against liabilities, the French insurer was also keen to ensure its US credit portfolio was properly positioned against a backdrop of changing interest rate conditions.
Being more risk-averse is also a priority this year for Gregoire Picquot, CIO for Asia at BNP Paribas Cardif, who said that avoiding risk at a time of volatility in equity markets is what he is most concerned about.
In the past three to four years, almost every country in Asia benefited from very positive equity market movements, In 2019, the priority is to manage these expectations lower, he said at the AsianInvestor event.
“There was a warning last year obviously…I would say that from a tactical perspective, we’re trying to manage [reduce] our exposure in the equity market. We believe there might be a second round of corrections,” he warned.
Last year, high volatility in global equity markets saw major benchmarks such as the MSCI World index shed nearly 9%, while the MSCI Emerging Markets index fared even worse, dropping nearly 15%. This year, equities have seen a strong rally, but there are concerns about how long this optimism could last.
Meanwhile, staying cautious is unlikely to deliver the returns insurers need to deliver to their policy holders -- and that means they can’t afford to stay on the sidelines forever, despite market uncertainty.
“Our main priority is always to meet the illustrated rates of our [insurance] products, in a responsible way, with the right risk-adjusted return,” Stephan van Vliet, CIO at Prudential Corporation Asia, noted.
In the hunt for such return, Prudential is looking towards Southeast Asia to build up its international assets, as well as other assets to diversify its investments and deliver good returns in Hong Kong and Singapore, he said.
HSBC Insurance’s Chan also said the insurer is considering expanding its in-house investment team, noting that boosting investment capabilities when the portfolio is steadily growing is justified.
“Right now, we are a team of 10 people looking after $40 billion [in assets under management]," he said.
Currently, the insurer is leveraging the resources and infrastructure of its asset management arm within the group. But increasingly, the question as to whether expertise should be built within the in-house team is being considered, he said.
“The trade-off is whether we have the required level of oversight and governance.”
He said discussions are ongoing about the possibility of recruiting specialists into the team, especially in assets in which the insurer has a large allocation. “We are considering the pros and cons,” he added.
BNP Paribas Cardif’s Picquot, meanwhile, said his firm is hunting for foreigh exchange specialists given one of its key areas of focus this year is FX management.
With US interest rates set to climb, the France-headquartered insurer faces higher hedging costs in almost every country it invests in, said Picquot.
The carry positions have been impacted in terms of profitability and there is no quick-fix solution, he noted. The cost of carry is a reference to expenses incurred as a result of an investment position, including interest and opportunity costs.
“We are really focusing on [hiring] FX derivative experts," he said, adding that in markets such as Taiwan, up to 50% of investments made by the insurance industry could be in non-domestic instruments. It's one of the reasons the insurance firm is on the lookout for specialists well versed in foreign exchange, he added.
To get more insights into hot-button topics for insurers, look out for AsianInvestor’s inaugural Insurance Investment Forum in Singapore on March 14. For more information, please click here.
*The story has been updated to reflect HSBC Insurance's name change to HSBC Life