Insurers and liability management
Insurance executives in Asia say they’re on a steady investment course, despite the volatility roiling global markets, because they measure their investment goals in decades rather than in months.
Markets always go up and down, but the turmoil in recent months has been exceptional. Currency, debt and equity markets have all gone through wild swings, not least because investors around the globe are preparing for an easing in the US Federal Reserve’s market support monetary programme.
Bernd Gutting, Regional Chief Investment Officer at Allianz Investment Management, says while he does not change investment allocations on the €30bn ($40bn) worth of regional assets he manages based on market volatility, such volatility can have secondary effects, such as altering the credit ratings of investments, impacting global strategy in terms of how much risk is allocated to one region, or affecting local solvency ratios.
“The level of interest rates is something that actually bothers me more than market volatility,” Gutting says. “I’m more dependent on what products are going to be sold, rather than what capital markets are doing.”
With life insurance policy maturations often extending well beyond 30 years, falling interest rates can create a risk that is harder to counter than market volatility.
“A lot of these traditional life products are not economically viable anymore if they fall below the threshold,” he adds. “What you can do, theoretically, is to hedge against falling rates, [products] that get you some sort of protection against falling interest rates. But in most Asian markets we are not allowed to use derivatives to do that, and even if markets allowed, in most markets there are not really counter parties who are able to do that, so that is the tricky thing.”
Finding investments with a long enough maturity can be a challenge for Asian insurers, as the region’s debt market is still in development.
“Usually the policies are a longer maturity than anything you can find in the market,” Gutting says. “There’s no way to cash flow or asset match for those sorts of duration in most markets. In Japan you can do it, and it’s sort of possible in Korea, but not in most of Asia.”
Many insurers and pension funds have turned to infrastructure such as power plants and toll roads in search of longer maturation investments.
“They can match your liabilities, in terms of duration, and they usually provide you with a certain spread on top of a government bond,” Gutting adds. “The problem in in Asia is that these markets tend not to be very liquid, and everyone is looking at the same asset class, so these asset classes tend to be overvalued as well.”
Allianz buys infrastructure debt once the project is up and running, avoiding construction and start-up risks, and has already done so in Malaysia, South Korea, China and a small amount in India.
“We are always looking at this, but they are difficult to find, so we don’t have many,” Gutting says. “Everybody that has long term liabilities is looking at these assets, like insurance companies and pension funds.”
In late July, Hong Kong-based insurer AIA Group announced strong results for the six months ended 31 May 2013, and gave the market a glimpse of its investment performance. Investment yield was down to 4.8%, matching the full year return for 2012 but down from the 5% return seen in the year ago interim report. Investment returns were 7.1%, up from 6.5% in the year-ago period.
It was steady-as-she-goes for AIA’s $106.703bn in invested assets, despite the market volatility that has investors around the globe scrambling to protect their portfolios, says Chief Executive Mark Tucker. Investment allocations were largely unchanged, with fixed income accounting for 86% and equity at 11%, with cash at 2% and properties accounting for 1%.
“We haven’t made any major strategic asset allocation shift, certainly not in the last quarter,” Tucker says. “It moves, but not material, and not strategic.”
“The short term volatility does not make a significant difference to us,” Tucker adds. “If you look at AIA’s performance over the past three years you’ve seen immense volatility in currency markets, bond and equity markets and political changes. But then look at AIA, it has been consistently strong. We’re not managing money on a short term basis, we’re managing it on a long-term basis to match the liabilities.”
Tucker describes concerns over monetary tightening in the US as “hypothetical” given AIA’s longer term outlook. “We’ve seen such volatility over the past six or seven years, and we’ve managed that volatility. If you go back 20 years, again we’ve seen incredible volatility, again we’ve managed through that volatility. So moving currency rates, interest rates, these are part of the cycle and that’s how we deal with them.”
Tucker also attributes some of that steady approach to AIA’s experience in Asian markets, having built up expertise and understanding that gives the insurer an advantage. “We’re buying bonds and holding those to maturity, and our credit performance there has been exceptional. We’ve seen no defaults in bonds in the last 20 years. We’ve been immensely supportive in building the yield curve for a number of governments across the region over the past 20 years.”