AIA, FWD lead efforts to diversify risk with derivatives
Life insurers based in Asia are notably less confident about the current investment outlook than their global peers, according to a new study released on Tuesday (October 8) by BlackRock. That concern is prompting some to diversify their risk via derivatives, more specialised fixed income mandates and private assets, including AIA and FWD.
BlackRock’s eighth Global Insurance Report was based on responses from 360 insurance and reinsurance executives from 22 countries. It noted that 78% of global insurers globally hold a “surprisingly positive mood” about the current investment outlook. They cited the US’s easing monetary policy as an important factor for this constructive sentiment amid a late-cycle environment.
But insurers in Asia-Pacific were notably less bullish. Only 66% of the region’s insurance company respondents said they are positive about the current investment outlook. The report also attributed this muted enthusiasm to Asia Pacific’s greater vulnerability to the fallout from escalating US-China trade tensions.
In the latest move to pressure China, the US made an announcement on Monday (October 7) to blacklist 28 Chinese entities involved in surveillance and artificial intelligence. In addition, $250 billion-worth of Chinese goods are set to become subject to a higher US tariff from October 15.
Forty-seven percent of Asian insurers also said they worry most about asset price volatility from a range of market risks such as interest rate risks and credit risk, potentially reflecting their higher emerging market exposures, according to the report.
DIVERSIFYING RISKS
The various uncertainties lurking in the market has prompted one of the world’s top insurers, Hong Kong-headquartered AIA, to seek out ways to better diversify its risk.
“While at an aggregate level the risk profile may largely stay the same, the way in which the components in the portfolio interact starts to be more dynamic,” said Mark Konyn, chief investment officer of the $256 billion* life insurer, in the Blackrock report.
To do this the insurer has begun running more local currency investment portfolios, while deepening “local credit expertise to ensure that AIA has the right breadth of coverage in each of the credit markets as they develop”.
This tallies with a Willis Towers Watson research paper published on Tuesday, which advised that asset owners appointing specialist managers in differing areas of emerging market debt would enjoy better investment returns, as fund managers typically lack the skills to cover every component of emerging market fixed income.
In addition, Konyn said AIA has strengthened its derivatives expertise and resources, which allows its investment team to be “more flexible and dynamic in the way in which we hedge some of the risks in the portfolio”. He did not respond to emailed requests for more details.
That approach resembles that of another regional insurer, FWD Group, whose chief investment officer, Paul Carrett, recently told AsianInvestor that his team, which manages $33.8 billion** in assets, has a “strong conviction regarding the usefulness of derivatives”.
Another strategy AIA has adopted is to better develop internal investment capabilities in infrastructure and private debt. Konyn said he expects both to be “increasingly significant components” within the firm’s fixed income portfolios.
This also falls in line with some other Asian asset owners, including Korea’s Public Officials Benefit Association. It recently said it planned to commit $250 million to five private debt funds.
PRIVATE ASSET CAUTION
Nonetheless, Konyn has told AsianInvestor previously that he is very careful about allocating to private assets given their associated illiquidity.
Carrett has similar views, having told AsianInvestor that while asset owners typically enjoy an illiquidity premium from investing in private debt, skyrocketing demand for such assets has caused prices to rise and eroded this benefit.
“At a certain price, there's no illiquidity premium left on these assets, so we are quite wary of private credit,” Carrett said. “Five years ago, people didn't talk about private credit nearly as much as they do now. It seems everyone assumes that there are liquidity premiums to harvest just because these are illiquid assets.”
Asia-Pacific respondents account for 28% of individuals polled in BlackRock’s survey, while 40% and 27% of the responses come from executives based in Europe and North America, respectively. Latin American insurers are the least represented, accounting for just 4% of the survey. All respondents combined represent an estimate of $16 trillion of assets under management.
** As of June 30, 2019, according to FWD.
This story has been updated to reflect the latest AUM figures of FWD.