Sun Life of Canada Philippines, the country's second-largest life insurer by assets, hopes it will finally be able to increase its exposure to risky assets by the end of the year following the introduction of a new regulation to loosen strict investment restrictions.

“We recognise that we need to chase yield and to dial up on risk,” chief investment officer Michael Gerard D. Enriquez told AsianInvestor. “We are looking to diversify not only on asset class but also offshore, as soon as the regulator allows us to do so.”

Michael Enriquez, CIO

The Canadian life insurer’s Philippines entity is eager to expand its array of investments, particularly offshore, following decent asset growth in recent years. Sun Life Philippines has seen its assets grow from Ps195.87 billion in 2016 to Ps274 billion ($5.7 billion) at the end of December 2020.

However, its asset allocation has not changed in the last five years and remains highly concentrated in local-currency fixed income. This is due to regulations covering the life insurers, which prevent them from making investments in foreign currency assets.

“We’re barred from buying dollar-denominated assets to back peso liabilities, even if we can hedge it,” explains Enriquez. “Obviously the bulk of our liabilities are peso [-denominated], so we're forced to just be within the Philippines in terms of looking for assets,” he says.

That could well change, as a new circular from the government that is expected by the third quarter of this year seeks to change the rules to let investors back peso liabilities with back dollar assets. Enriquez expects the Foreign Currency Denominated Instruments (FCDI) circular to take effect immediately upon release, allowing life insurers to invest offshore. Sun Life would be among the first to take advantage of this, if it passes. 

“Offshore would definitely be something that we're looking at,” says Enriquez. The company is eyeing dollar-denominated debt and equity in the US and Europe, as well as potential investments into Asian markets in which the group has a presence, and which are therefore more familiar.

Enriquez, who also heads investments at Sun Life Philippines' asset management business, told AsianInvestor that its asset allocation had not changed since the publication spoke with then-chief executive Rizalina Mantaring in 2016.

Today, as then, 95% of the firm's assets remain invested in local currency fixed income, primarily government bonds. The remaining 5% is in domestic equities. Enriquez confirmed that Sun Life continues to manage all assets internally. He says the company had challenges meeting yield targets of close to 5% as local interest rates reached all-time lows last year.

CONCENTRATION RISK

It makes sense that Enriquez would wish to do so. Investors who highly concentrate their investments into one particular asset class greatly increase the risk and volatility of their investment returns.

To mitigate their exposure to local fixed income markets, Asian life insurers elsewhere – and global asset owners more widely – have in recent years upped their allocations to alternatives such as infrastructure, real estate or private equity in search of yield. The need to diversify beyond fixed income has become even more pressing in light of the prolonged low interest rate environment.

However, insurers in the Philippines even find it a challenge to even diversify into local alternative assets, due to a lack of available investible opportunities.

Enriquez said the previous government identified a number of large-scale infrastructure projects, including airports, toll roads, trains and mass transport systems, and intended to execute them through public-private partnerships.

“We were quite excited back then to be able to participate [in financing these infrastructure projects] and dial up on risk,” he said.

However, the current administration of president Rodrigo Duterte, who was voted in in 2016, prefers to use official development assistance to finance the country’s infrastructure development. '

“It’s cheaper to borrow directly from foreign governments at low interest rates, which are around 0.01%, especially if you borrow from Japan,” Enriquez said. He added that the current government also believes privately built major infrastructure projects to be more expensive and harder to execute.

“Since then, there were no available projects for us on the infrastructure side,” Enriquez lamented.

OTHER LIMITATIONS

Sun Life has also been approached over the possibility of diversifying into private equity funds, but Enriquez said most were dollar denominated and therefore not possible for it to invest into.

One option that local life insurers are allowed to pursue is investments into local real estate, and some have done so, says Enriquez. But Sun Life is a foreign-owned entity, which means it is barred from owning land in the country. That makes it harder to put money into property-related projects. 

“We can own the improvements, but not land because we're foreign,” Enriquez explains. 

Despite this, Sun Life, which first entered the Philippines in 1895, is the country's leading insurer by premium and net income. In terms of assets under management, it is second only to Philam Life.

Looking forward, Enriquez hopes the government will liberalise the investment activities of life insurers to help them source better investment returns and thus offer more appealing insurance policies. He believes this should start with the plan to let insurers buy dollar denominated assets and invest in offshore funds.

Beyond that, Enriquez hopes the country's regulator will eventually allow insurers to also invest into non-traditional activities, such as repurchase agreements, and to be permitted to use more types of derivatives, such as futures options, to hedge risk.

More analysis on this story to follow.