The year-long Covid-pandemic has brought about unprecedented volatility in asset prices, but this also offered investment possibilities for life insurers, including in corporate credits, emerging Asia bond markets and some alternative assets, say leading life insurers.
Top executives from insurers AIA, Prudential Asia and Ping An Overseas discussed the assets in which they have invested overweight at a panel at AsianInvestor's Insurance Investment Week online event, on March 16.
Tung Hoi, the chairman and chief executive officer at Hong Kong-based Ping An Overseas Holdings, said at the panel that the Chinese life insurer had been adding longer-dated credit assets to overcome short-term volatility.
“We have to make sure that we matched the liabilities with our assets, which is critical,” Hoi said, adding the group has continued to allocate longer-dated assets, including bonds and alternatives, to their funds.
Ping An Overseas, a subsidiary of China-based Ping An Insurance (Group), is mainly responsible for the parent group’s offshore investments. As of the end-2020, its investment portfolio stood at Rmb3.74 trillion ($575.4 billion), having grown 16.6% from the end of 2019. For the past 10 years its average total investment yield was 5.3% per annum.
Mark Konyn, group chief investment officer at AIA Group, also adopts a similar strategy. Konyn stressed that instead of trying to time the market and conduct short-term trading, AIA pursues a “protection-driven” strategy, which is critical as it allows the insurer to cope with any future Black Swan events.
“Less than 3% of our bonds roll off every year. So we're not in a hurry to constantly reinvest and chase target yields,” Konyn said, adding that AIA has been taking advantage of any market opportunities over the year to extend duration with a heavy weighting to government bonds.
“If we can't invest long, we can't underwrite those liabilities,” he said.
AIA has also worked extensively with local government officials across several markets to create an environment that allows the industry to maximise longer-dated credit assets' growth potential, he added, without providing details. The life insurer’s total investment portfolio stood at $244 billion as of the end of 2019.
Stephan van Vliet, the chief investment officer at Prudential Corporation Asia, said that the length of the crisis and the severity took everyone by surprise, and in the middle of last year the firm, like AIA, took advantage of a number of opportunities that have emerged in credit markets.
LOCK IN CREDIT SPREAD
While the low-interest-rate environment has been easing from historical lows, it has been a challenging time for insurance companies.
In order to offset very low yields, many have been forced to look at credit investment opportunities in emerging Asia. And this demand and low rates has driven even these to low yields.
“Take Vietnam, for instance; who would ever have thought that we would have a 2% interest rate for 10-year government bonds in a country that's BB rated?” Vliet said, “But the only way to deal with that is to find attractive credit spreads."
He added that Prudential Corporation Asia has been working with governments like authorities in Vietnam to encourage more long-dated bond issuance. It has also doubled down on innovation in bond-buying, for instance, bonds that originate in different currencies, guaranteed bonds, and bonds with collateral in multiple countries throughout Southeast Asia. Although it may take time, that is the only way to compensate for the lower interest rate and get the extra credit spread, van Vliet said.
Ping An Overseas, on the other hand, prefers the credit of high-quality state-owned enterprises in China that are currently seeing poor performances due to the pandemic. The overall government bond market lacks liquidity, Hoi said. As of the end of 2020, Ping An Overseas has Rmb139 billion invested in government bonds and Rmb66 billion in corporate bonds.
“We also are looking for opportunities to invest in real estate due to inflation pressure,” he added.
The panellists also agreed that environmental, social and governance (ESG) criteria now play a prominent role in investing, especially with Covid-19. The executives believe that ESG should be fully integrated into the investment process.
Konyn from AIA said that insurers are balancing the returns and risks for bonds with maturities that are decade-long instead of a few months, which makes integrating ESG factors all the more important.
“We have been integrating ESG criteria into our investments,” said Konyn. It is no longer about debates on the relevance of ESG, he added, noting that insurers should move towards “action” because, given the long-term nature of investment portfolios within an insurance organisation, any ESG impact can be noteworthy.
Hoi said that Ping An has also adopted an ESG framework and ESG scoring system into its investments. The Chinese insurer developed a series of AI-ESG products focusing on corporate management, risk monitoring and analytics solutions for ESG and climate risk analysis, including insights into its portfolio's carbon footprint.