Insurers re-think alternatives amid higher rates, new rules
With interest rates soaring in the past year and new regulatory regimes being implemented, the appeal of alternative investments is being scrutinised among insurance companies based in Hong Kong and beyond.
An ultra-low interest rate environment in the years leading up 2022 meant that the search for a liquidity premium made alternatives highly appealing. With interest rates now at higher levels, the notion of safe-harbour fixed income looks relatively more appealing, investors say.
“Alternatives definitely form a part of the portfolio, but we need to recognize that 6% in investment-grade credit is incredibly appealing and ask if the additional volatility is worth it,” Robert Turnbull, managing director and head of asset management in Asia at Swiss Re, said on stage at AsianInvestor’s Insurance Investment Briefing Hong Kong on March 10.
Also read: Insurers warm to high interest rates amid market volatility
With alternatives being a diverse category of assets, it is also worth considering which kind of alternative to allocate to going forward, said Shiuan Ting van Vuuren, chief investment officer at Sun Life International HuBS.
“If real estate can only provide you yields at 3-5% instead of 5-6%, maybe it’s time to tone the real estate allocation down. When you include private debt, then that could still be considered attractive if you always have a minimum hurdle over public yields,” van Vuuren said.
Alternatives will still hold some relevance and appeal, according to Elton Shum, head of Asia regional fixed income portfolio management and trading at Manulife. He pointed out that Manulife will continue to be a major player in the alternatives space, leveraging the company’s global scope.
“We are a global company with different blocks of businesses, which is an opportunity for us to be an efficient allocator of global assets into our global balance sheet. If you can find the right match to dampen that earnings volatility and match with the right block of business, then alternatives are certainly doable,” Shum said.
He emphasised the recognition that high yields mean high volatility, so Manulife does recognise the need at times to “play safer” so as to have “a good story to tell” rating agencies and investors.
“We surely like the yield we get from alternatives, so if it comes with higher volatility, we look at the tradeoff. Such a tradeoff is being discussed internally here in Q1 and it is a learning process when we don’t know how IFRS 17 implementation will look like exactly,” Shum said.
For now, it is unclear how insurance contracts and risk will be parsed by analysts. Shum expects it will be a learning process over the coming quarters as they talk to analysts and the market on what will be considered in terms of their recommendations and ratings. That will influence managers’ decisions and appetites for making the alternatives tradeoff, he elaborated.
As Shum pointed out, insurers must now relate to the still ambiguous International Financial Reporting Standard 17 framework, a new accounting standard for insurance contracts effective since January 1 this year. It aims to help companies and entities value risk, especially where it is transferred between parties.
Turnbull pointed out that for some Asia-based insurers it will be a bigger change compared to insurers also active in Europe. There, insurers are already working under the EU Solvency II framework, and might have reduced allocations to equities and alternatives already purely in an effort to meet economic capital standards.
Using an airplane metaphor, Turnbull said that insurers are looking towards their finance colleagues and others to find out where the airplane is going to land for IFRS 17.
“IFRS 17 is still a slightly moving target and the winds are still blowing, the airplane is still moving around in the air,” he said, elaborating:
“I don’t think every company is fully onboard with where their IFRS 17 metrics will land and know exactly what portfolio construction they will move to. I doubt that companies have full certainty over their IFRS 17 landing pad.”
Also read: Three insurance CIOs weigh in on evolving impact of IFRS 17, ESG