Zurich strives to cut HK portfolio duration gap

The Swiss insurer’s CIO for Hong Kong and Singapore wants to buy longer-dated bonds to better match the firm’s assets to its liabilities. But that's easier said than done.
Zurich strives to cut HK portfolio duration gap

The relative lack of long-dated bonds in Asia remains a major challenge for life insurance firms looking for investments to match the multi-decade horizons of their liabilities. The situation has not improved in markets such as Hong Kong, despite continued pressure from the insurance industry, senior executives have told AsianInvestor

Hence, while some insurers are now keen to reduce the duration gap between their assets and liabilities in Hong Kong, among other markets, they are struggling to do so.

Swiss insurer Zurich, for one, is looking to lengthen the overall duration of its fixed income portfolios in the Chinese territory, Thomas Spirig, chief investment officer for Hong Kong and Singapore, told AsianInvestor. The duration on the asset side has been short of that on the liability side for some years now, he said, and it is a good time to try to narrow that gap.

Thomas Spirig, Zurich

As long as inflation remains in check, Spirig said he did not envisage US interest rates rising dramatically at the long end (between 10 and 30 years). Hence, he suggested, it now makes sense to better match asset-liability duration using US dollar-denominated bonds.

Duration is a measurement of a bond or bond portfolio’s interest rate risk that takes into account the maturity, yield, coupon and call features of the bonds in a portfolio, according to fixed income manager Pimco. It makes sense for insurance companies to match the maturity of their investments as closely as they can to their liabilities. 

Portfolio duration has resurfaced as a pertinent issue given that interest rates in regions such as Europe and the US are seen to be on an upward curve (see box, Re-assessing portfolio duration). But at least in those markets, bonds with maturities of 30-years and more are available.


Not so Hong Kong.

The territory’s currency has been pegged at HK$7.8 per US dollar since 1983, as a result of which the Hong Kong Monetary Authority (HKMA) must mirror the US Federal Reserve’s monetary policy to maintain currency stability.

Yet while 30-year US Treasuries are available, the longest-dated Hong Kong government bonds are 15-year issues, noted Spirig, who oversees $1.5 billion of assets. That is too short for matching liability adequately for long-term insurance.

Insurers continue to lobby the Insurance Authority and HKMA with a view to getting longer-dated issuance by the government. But it doesn’t appear to be a high priority for HKMA; no progress has been made on this front, Spirig said.

Yet interest rates are still comparatively very low, so debt can still be issued very cheaply in a long-term context, he added. The Hong Kong base lending rate is 2.75%.

Likewise, insurance executives such as Mark Konyn, CIO of Hong Kong-based AIA, and Stephan van Vliet, Prudential's Asia-Pacific CIO, have also told AsianInvestor in the past six months that more long-term bond issuance in Asia is necessary.

Moreover, Chinese insurers, such as China Life and Ping An, have been seeking to reduce their duration gaps as domestic asset-liability rules tighten. China Life has tried to do so by increasing its exposure to alternative credit assets.

Insurance firms elsewhere are also making similar moves. Zurich, for instance, is set to invest its Hong Kong, Singapore and Malaysia portfolios into private debt this year, despite concerns about the relatively low yields and low liquidity of such assets.


A growing concern for the insurance industry, especially for life companies, is what to do about portfolio duration gaps, given that interest rates in Europe and the US are seen to be on an upward curve. Moreover, under Europe’s Solvency II regime, insurers have to set aside more capital if they have a duration gap between assets and liabilities.

Insurers’ approaches to this issue vary by market, said Estelle Castres, Paris-based head of global key insurance clients at Natixis Investment Managers. UK insurers have been allocating more lately to absolute return and alternative strategies, both liquid and illiquid, she told AsianInvestor in December. Yet some French and German players have been lengthening duration through infrastructure as a proxy for their fixed income investment, she added.

Estelle Castres, Natixis IM

Opinion is divided over whether firms should seek to match their assets as closely as possible to the maturity of their liabilities or wait to see how interest rates pan out.

With interest rates in the main global economies expected to rise – though not in the very short term – reviewing asset and liability duration based on the new rate cycle is essential, Alexandre Mincier, Paris-based global head of insurance at US fund house Invesco, told AsianInvestor in late November.

If rates go up, the duration of liabilities falls, meaning that if insurers do not adapt their duration calculations today they will need to sell the assets when rates rise, leading to some realised losses.

Meanwhile, Gareth Haslip, London-based global head of insurance strategy at JP Morgan Asset Management, suggested it may be time for insurers in Europe to close the duration gap if they are able to do so. 

“From a risk perspective, there is never a perfect time,” he said, “and now may be as good time as any to close the gap.”

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.

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