Life insurers in Asia must combine responsiveness and thoughtfulness to successfully navigate a difficult investing environment and sizeable regulatory demands, speakers at the Insurance Forum in Hong Kong on June 1 told a select group of insurance executives.
The event, which was jointly arranged by AsianInvestor and Invesco, began by focusing on challenging market conditions. Low interest rates and a tough regulatory environment have eaten away at insurers’ ability to cover their liabilities.
The temptation to move up the risk curve—adding riskier bonds or shifting more into equities—is commonplace, but investment experts on the panel warn against this. Instead, they suggest finding alternative types of risks that offer better returns but don’t necessarily increase the risk within the portfolio.
“There are no silver bullets here, but there is plenty of gold dust. If you can add 10 basis points here and there, then you can solve some of your funding issues. Not easy but it adds over time,” explained Will Rainey, head of investment strategy for Asia at Willis Towers Watson.
Don Guo, chief investment officer (CIO) at Asia Capital Reinsurance Group, said investing in a more dynamic manner is necessary when managing assets, noting he has added more credit factors into his portfolio.
“We are now investing in European financial credit, callable bonds, and even US residential and commercial mortgage-backed securitisations.” Guo said, arguing that the economic fundamentals in Europe and the US boded well for these types of assets. He is able to pick up residential mortgage backed securities (RMBS) at 40 to 50 cents on the dollar, he added.
But Gareth Isaac, EMEA CIO for Invesco’s fixed income portfolio, noted that valuations in general were looking “stretched” and opportunities were increasingly limited.
“The technical bid for fixed income is insatiable," he said. "You can’t place your money in negative-yielding government bonds, QE [quantitative easing] is absorbing so many quality bonds and even though the US Federal Reserve is debating now to cease investing in debt markets, it won’t be selling its current assets.”
Nicholas Savoulides, head of global solutions research at Invesco, was also keen to impress on the audience the importance of planning, although in the context of an effective liability-driven investment (LDI) strategy.
He delved into the need for insurers to consider the risk factors of debt investments, noting that this requires considering the impact on overall bond performance such as default rates and rating changes at various levels.
One example was AAA grade bonds, which offer little yield and yet also face the risk of a downgrade. “With a AAA bond there’s only one way to go,” Savoulides noted. In contrast, a BBB bond could enjoy an upgrade as well as a drop.
He added that regulators today typically prefer that insurers aim to match investments to the movements of their liability payments.
“If your portfolio is cash flow-matched, then the capital charges can be lower," said Savoulides. "The regulators see a portfolio that is not required to be rebalanced, or assets required to be sold, positively."
The conference moved on to cover factor-based investments. Stephen Quance, a director for factor-based investing at Invesco, explained that factor strategies could offer investors multiple new ways to consider and take advantage of their market outlook, as well as the practical manner in which they could help offset market volatility and their solvency ratios.
In the early afternoon the conversation moved to Asian equities and real estate. Invesco associate director William Yuen ran the audience through the risks and value on offer in Greater China equities. He discussed how the fact that investments done through Stock Connect were not counted as part of insurers’ overseas allocations offered them more flexibility to invest through Hong Kong and should, eventually, help increase their overall foreign stock exposure as well.
Following Yuen was Lau Cheng-soon, managing director of Asia Pacific at Invesco Real Estate. He weighed up the appeal of property against other illiquid alternative asset classes, such as infrastructure and private debt. One key takeaway was that real estate assets have risen by 10% or more over three and five years, and they had yielded 5.2% annually on average from 2012 to 2016.
Experts in the penultimate panel considered whether adding environmental, social and governance (ESG) principles was worthwhile.
Definitely, said Karlyn Adams, associate director at Business for Social Responsibility. “The fact is that climate change is occurring and there will be an effect on assets.”
She added that ESG could help produce better returns too. She pointed to the focus of Alcoa chief executive Paul O’Neill on worker safety ahead of other metrics at the aluminium producer in the 1980s, which improved productivity and helped underpin a five-fold rise in profits during his 13 years in charge. “It affected how the management looked at the business as a whole and that translated into financial metrics,” she noted.
Bonnie Saynay, global head of proxy governance and responsible investment for Invesco, noted that as ESG gains traction among institutional investors in Asia, Invesco is creating tailored advice for each interested party.
“We have fixed income, equities and alternatives capabilities, so we need a nuanced approach that suits different requirements,” she said. “One size does not fit all.”