Sun Life favours infrastructure, real estate debt under new RBC regime

The life insurer wants to increase its investments in the private debt, credit, and derivatives markets as it strives to manage its liabilities better.
Sun Life favours infrastructure, real estate debt under new RBC regime

Sun Life Financial plans to utilise private debt, credit, and derivatives to deal with the low interest-rate environment and preparing for regulatory changes globally and in Hong Kong.

The life insurance company particularly favours corporate bonds from A to A-, with a growing interest in BBB credits too. Its investment team also likes project debt, including infrastructure and real estate.

Jateen Vaghela, the company’s vice president and head of asset liability management (ALM) in Asia Pacific, believes a combination of a low-interest rate environment, Hong Kong’s new risk-based capital (RBC) regime for insurers, which will take full effect in 2024, and the introduction of the new IFRS 17 (International Financial Reporting Standards) on January 1 2023, could have a “tremendous impact” on life insurance companies.

Under such circumstances, insurers need to manage their interest rate, foreign exchange and credit risks better, Vaghela said in an interview during AsianInvestor’s 14th Institutional Investment Week Korea. Tools could include extending asset duration and adjusting hedging strategies to better manage guarantees under different economic environments, he said.

As Hong Kong’s capital market is closely tied to the US’s, which has a huge supply of US dollar-dominated assets, a Hong Kong life insurer such as Sun Life in Hong Kong can use hedging overlay strategies to better manage foreign exchange risks, Vaghela said.

New developments such as RBC and IFRS 17 require life insurers to value assets and liabilities on a market basis. It means that long-dated credit risk will be more expensive to hold. “Below investment grade bonds will be even more expensive on the capital utilisation – they are very intensive,” he said.

Jateen Vaghela,
Sun Life

Sun Life wants to remain a long-term investor in credit, which is their primary asset class, Vaghela said, so it needs to focus more on return-on-equity at a portfolio level.

The life insurer will be looking at A to A- credit investment, while expanding in BBB, where supply is growing. Hong Kong accounts for a large percentage of Sun Life’s bond investments in Asia. In the rest of Asia, its fixed-income holdings consist mainly of government bonds and quasi-government debt.

Sun Life operates in eight markets across Asia, while Hong Kong and the Philippines are the biggest. It has $50 billion of assets under management in Asia, and $25 billion in general fund account to back insurance liabilities.

Under regulatory changes, Sun Life will continue to expand private fixed income investment in North America, where its headquarters are, as well as in Asia, with a focus on private debt of toll roads, renewable energy facilities such as hydro, real estate and quasi-government assets.

“The tenor of these assets are sometimes much longer than the public bond markets. So that's good for ALM matching,” Vaghela noted. “You need to work through what a reasonable liquid premium pickup is, and what do you think is value for money when you invest in this type of asset classes. But typically, I would say, you’re getting the benefits of ALM, and you're also investing in something that diversifies your portfolio.”


Derivatives are also critical components in the ALM toolkit, Vaghela believes. Using derivatives provides a win-win situation as a hedging strategy as they help enhance ALM capability for complicated written financial guarantees and is a faster and more agile approach to manage against interest rate and other market risks.

It also optimises capital requirements under regulatory changes, he said. “That’s a great win, and that's pretty beneficial under RBC type of regime.”

Jaijit Kumar,

But outside of Hong Kong, derivatives supply has been hard to find. “(In the other markets Sun Life operates in) We hope to see them growing, and I'm seeing some areas that are growing in India,” Vaghela noted.

During AsianInvestor’s Insurance Investment Week in March, investment veterans at AIA and AXA said they believe Hong Kong-based life insurers should allocate more to derivatives and alternatives assets, such as private equity and private debt, to mitigate the impact of the RBC regime.

“We believe that a carefully structured and well-analyzed program of such derivatives usage could lead to some capital efficiencies,” said Jaijit Kumar, head of Asia insurance solutions at Invesco.

“We have observed this trend of derivative usage for capital management and ALM in other jurisdictions and believe this is also something we may increasingly see here in Hong Kong, subject to the applicable derivatives markets being adequately broad and deep,” he told AsianInvestor.

Chris Hancorn, PwC



Although return-guaranteed products have a fair amount of Hong Kong’s life insurance business, the level of guarantee customers can get from new products is likely to be lower, under the current low-interest rate environment and the impending RBC regime, noted Chris Hancorn, a partner with PwC Hong Kong who leads its Asia actuarial services.

The level of guarantees in the long-term is likely to trend more closely to the levels of long-term interest rates, which would be 2% or even lower, Hancorn told AsianInvestor.

But he added that RBC is for the benefit of consumers, which provides appropriate levels of protection by putting a bigger focus on life insurers’ risk management.

Hong Kong has been slow to implement a risk-based capital regime compared to major markets such as the EU, US, mainland China, Japan and Korea.

The implementation of RBC is an important milestone to promote the maturity of Hong Kong’s insurance regulatory regime, said PwC’s Hong Kong insurance leader Billy Wong. 

This story has been updated to clarify that a comment from Jateen Vaghela referred to the fact that the tenor of private debt assets are often superior to those available in public bond markets. 

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