AIA Hong Kong eyes private credit 'outlier' under new capital rules
AIA Hong Kong views private credit investment as an appealing investment under the city’s new risk-based capital (RBC) regime for insurers, despite the onset of a rate-cut cycle, according to the insurer’s investment chief.
Under Hong Kong’s new regulatory framework, private credit is assigned a 15% risk charge, while it could potentially generate returns of around 10%. This is significantly lower than the 50% risk charge applied to private equity.
“That (private credit) is an outlier,” said Sam Morgan, chief investment officer at AIA Hong Kong. “So, it wouldn't surprise me if there's more investment in that direction in the coming years,” he told AsianInvestor’s 15th Insurance Investment Briefing in Hong Kong on September 5.
The capital treatment for unrated private debt in Hong Kong is more favourable compared to other markets.
"In Hong Kong, unrated paper gets the equivalent of between a triple B and double B rating," Morgan explained, adding that with a 15% risk charge, the risk-adjusted returns are very compelling.
He contrasted this with the capital charges of similar unrated exposures in Europe, which are far more punitive. "In Hong Kong, it's just this massive, weird outlier that sits well above the normal line [in terms of capital efficiency]."
"If you look at any sort of risk versus capital charge, it's an opportunity that is hard to ignore," he said.
Although yields on floating-rate private credit assets might decline following the Federal Reserve’s recent rate cut, returns remain attractive in a relatively high-rate environment, he noted.
Tim Antonelli, head of multi-asset strategy for insurance at Wellington Management, observed that private credit incurs no additional risk charge for its illiquidity.
For this reason, private credit is gaining popularity among insurers in the US, where almost 40% of their assets are allocated to this asset class. In Europe, the weighting can reach 20%, whereas in Asia, the allocation is below 10%, Antonelli noted.
“I could see that increasing quite significantly,” he said.
As Hong Kong prepares for its RBC regime, private credit is becoming increasingly popular among insurers, particularly in the current high-interest-rate environment. Many life insurers in coversations with AsianInvestor this year, including HSBC Life and Income Insurance, shared their plans to raise allocations, although some also warned of the risk of an overheating market.
CAPACITY BUILDING
For many Hong Kong insurers, private credit is still a relatively new asset class. They largely rely on their investment arm or external managers to execute the allocation.
AIA outsources its private market investment to its asset management arm. Hence, Morgan’s team doesn’t have specialists looking at private credit directly.
“But having that skill within the group, from my perspective, is extremely important. Because it does give you the ability to assess different managers and really work through that and have generally specialists across [alternative assets],” Morgan said.
Xing Tao, chief risk officer at BOC Group Life Assurance Company, suggested that in the early stages, insurers can depend on external resources to build their alternative asset exposures.
But when the total assets under management reach certain levels, an in-house team needs to be built to manage those portfolios.
“Because the insurance company takes the ultimate responsibility, no matter return or risk,” Xing said.
ALM PERSPECTIVE
Ben Rudd, chief investment officer at Chubb Life, believes that alternative asset investment should be part of a multi-year program, where insurers gradually build their exposures.
“It's the complexity around it…Not just on the manager selection, but how you build that into your broader, longer-term asset allocation,” he said.
"There is a general move globally towards some type of risk-based capital structure," observed Rudd. He noted that such regimes underscore the importance of closely matching assets and liabilities.
However, Rudd highlighted that there are important nuances across different markets regarding the capital treatment of asset classes like private credit. Even within Asia, there are variations when comparing Korea's risk charges to the RBC regime in Hong Kong.
These regulatory differences can create opportunities for insurers to optimise their investments within the capital rules. "On the private credit side, the way you wrap different parts or products can become very important, because it allows you to benefit from lower capital charges while still getting the [return] pickup on different asset classes," Rudd explained.