Fixed income and floating-rate notes together account for some 80% of Samsung Life’s $150 billion in assets under management, meaning potential interest rate rises are a big concern, says Jeon Young-muk*, head of asset portfolio management for the insurer's general account.
For most of the firm’s outstanding policies, the average liability rate of interest is 7%, or higher, he tells AsianInvestor. It therefore has to continue to guarantee payouts based on interest rates from long ago – which means it can’t reduce its fixed income allocation until at least 2016.
“We hear advice that tells us to reduce our duration or simply get out of fixed income,” adds Jeon. “But who will guarantee that interest rates will go up – by how much, how fast? Maybe we can hedge that risk, but we need to be mindful that our liability duration is much longer than our asset duration.
“We are still dealing with policies sold 20 years ago when Korean interest rates were in double digits,” he adds. “Rates today may be higher than they were a year ago, but they are still low by historical standards.”
Most of Samsung Life’s fixed income portfolio is in domestic government bonds. However, the asset allocation is different for the firm’s separate account assets, which are sold on the back of variable annuity products.
Beyond fixed income, about 15% of the portfolio is in equities – including allocation to stocks in other affiliates of the Samsung Group – and 5% is in real estate.
Some 8% of the total is invested overseas – of that, half is in foreign-currency bonds issued by Korean companies and government agencies. That is down from 13% before 2008, at which point its foreign portfolio took a hit, leading to a sell-off.
However, Jeon sees its foreign exposure increasing again. “We have investment branches in New York and London. They are looking at adding both more securities as well as third-party managers.”
When asked why Samsung Life doesn’t just into cash, he says: “Then we risk being shut out of the market when interest rates go up. There may then be fewer issuers of long-term bonds. It’s prudent to get hold of long-term assets now while there’s plenty of supply.”
There’s plenty in the domestic bond market, says Jeon, noting that the government has been issuing 20-year bonds since 2006, and 30-year bonds since 2011, and other institutions have since followed.
*A full interview with Jeon appears in the latest (April) issue of AsianInvestor.