Zurich’s Hong Kong and Singapore businesses are set to make their first investments into private markets this year, most likely initially into direct lending, one of its senior executives has told AsianInvestor

According to the Swiss insurer’s chief investment officer for these two markets, the expected move is part of the wider group’s global push to raise its exposure to illiquid alternatives.
 
But in an interview in late December, Hong Kong-based Thomas Spirig also voiced his concerns over the relatively low yields currently available on private debt.

Others, such as Paul Carrett, CIO of Hong Kong-based insurer FWD, have expressed similar worries over whether the returns are sufficient for the risk involved, especially so late in the credit cycle.

Thomas Spirig, Zurich

To be sure, Spirig said he would have liked to enter direct lending in 2018 but that Zurich wasn’t able to make the move so quickly. Hence it expects to make the shift this year, initially into Western private credit markets, by committing money to external managers.

All of the $1.5 billion in Zurich's Hong Kong and Singapore portfolios is outsourced, with between 5% and 12% in equities (in mutual funds) and the rest in fixed income (in bespoke mandates) and cash. 

Zurich Malaysia also plans to enter private credit in 2019, but it will do so using its in-house capabilities.

Insurers are well suited to investing in private debt because it provides a steady income stream and generally attracts lower risk-capital charges under solvency rules than listed stocks or certain other alternative assets, such as private equity.

Investment demand for private credit has shot up in the past few years among insurance firms – and other asset owners – hungry for higher returns than is available these days on traditional bonds. 

MEAGRE RETURNS

However, that rising appetite has pushed prices up and heavily compressed yields in recent years.

Still, spreads on private debt are now wider than they were a year ago, Spirig said, “so you’re getting a better reward for owning it”.

“A year or two back you [would] have made significantly less on a private debt investment compared to today, in absolute terms," he added. Spirig said he felt that wasn’t sufficient in light of the mid-term risk being taken – especially given Zurich's view that the global economy is in the fourth quarter of the credit cycle.

A move into direct lending also has to make sense from a currency perspective, Spirig said. Private credit investments must be hedged back into the currency of the local liabilities, he explained, as solvency rules tend to penalise currency mismatches, as well as risky assets, by imposing higher capital charges.

Other alternatives, such as private equity, are seen as deterring insurance firms because of the capital charges imposed on them under solvency rules.

“If the capital charge [on certain assets] is 40% or more, then I would have to make a significant return on a standalone per-annum basis to make it work,” Spirig said, in light of Zurich’s global target return on equity (ROE).

The firm’s business operating profit after tax ROE is 12%, which he stressed is an overall number that counts for the entire insurance business and includes diversification effects.

ASIA LAGGING

Asian insurers lagging their Western peers in respect of their exposure to private debt, despite their growing appetite for it.

Alexandre Mincier, Paris-based global head of insurance at US fund house Invesco, estimates that insurers in Europe have an average 8% to 10% allocation to private credit, compared with a range of 3% to 5% in Asia.

In Asia there is also a greater divergence in terms of exposure, with some institutions allocating much more and others close to zero, Mincier told AsianInvestor in December. Most of the discrepancies are driven by the regulatory restrictions and the availability of private debt assets in Asian markets, he said.

This article has been updated to clarify certain points made by Thomas Spirig about the Hong Kong and Singapore portfolios' moves into private debt and about his views on returns available from the asset class.

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.