AIA, Sequis Life adjust investments in anticipation of Fed cuts
As the US Federal Reserve is expected to cut rates in the coming months, life insurers are preparing their investment strategies for this rate pivot, the audience heard at AsianInvestor’s Insurance Investment Briefing in Singapore on September 3.
“It's a great time, with even more urgency than before, to pile up those good quality, good credit bonds for the long term. It might also be the last very favourable level of rates to purchase long-term bonds,” Liu Chunyen, chief investment officer at AIA Singapore, said on stage.
With expectations that the yield curve will normalise from inverted to less inverted, insurers are looking to manage the asset-liability duration gap as the rates are cut, which will bring some volatility into their profit and loss statements.
“We basically focus on buying long-term bonds, and maybe in the next six months after the Fed pivot, we can enhance our return with investment-grade or high-yield, but good rating corporate bonds,” Muhamad Umar Johan Sidik, chief investment officer at PT Asuransi Jiwa Sequis Life, said on stage.
Sequis Life is an Indonesian insurer that has $1.5 billion under management.
LOOKING UP
The Fed’s pivot is considered a positive development for life insurers, as long as the soft-landing story is still intact, Sidik pointed out.
“It is positive for US equities because the Fed currently has room to wait to cut. If they are late, they can cut rates faster and with greater magnitude,” he said.
He also sees potential positive ripple effects of rate cuts across equities, beyond the US.
“We also favour global equities and selected emerging markets, particularly in ASEAN. As you can see, the region is gaining from the FDI [foreign direct investment] flow relocation from China. If you look at 2022 to 2023, the FDI inflow has been very large,” Sidik said.
Overall, the undervalued parts of the market that have been rate-sensitive are continuing to look attractive relative to the rest of the markets, according to Tim Antonelli, head of multi-asset strategy for insurance at Wellington Management.
He highlighted small-cap equities or developed market REITs among areas that have been underappreciated in the market rallies, to date.
“You'll find a little bit more potential for value and capital appreciation on top of the existing market. Those areas look pretty good,” Antonelli said on stage.
PRIVATE CREDIT
In private markets, private credit has become popular in recent years due to the relatively high interest rate environment. AIA’s Liu still sees potential for private credit after the Fed’s rate cuts, but pointed out that insurers need to be mindful of vintage risk.
“You must diversify [vintage year] even if private credit brings diversification, good returns and good cash flow. But you shouldn’t just pile it into the portfolio overnight. That vintage risk is staying for the next 10-12 years,” Liu said.
She also pointed out that private credit, like all private assets, is illiquid. Hence, liquidity management is also a factor when it comes to the attractiveness of private credit for insurers.
Hong Kong-based AIA is a major insurer in Asia, with $268.5 billion in total investments at the end of 2023. It has a presence in 18 markets across the Asia-Pacific region.
Wellington’s Antonelli mentioned how he cautioned insurer clients to look across private credit investments and also to look at the purpose they will be serving in different parts of portfolios.
“Investment-grade private placements, for instance, should be looked at akin to traditional public investment-grade fixed income. You should make that relative allocation decision based on the basis-point spread to public fixed income at that point in time,” Antonelli said.
At Sequis Life, Sidik and his team are currently neutral on private credit, but this is because the insurer has been adding to its private market allocations for the last eight years — to the extent that it has almost hit the regulatory limit.
“So the room to add is actually very limited, except we have cash exits from our underlying investments. We are neutral on private markets which have been in winter, and now optimism is building on rate cuts — but again, the amount of dry powder is still high,” Sidik said.