Eugen Loeffler is chief executive and chief investment officer for Asia at Allianz Investment Management, which oversees a €550 billion ($605 billion) portfolio of general account assets for German insurer Allianz. In Asia the firm has €25 billion under management and insurance entities in 10 markets from India to Korea.
AsianInvestor asked Loeffler about the challenges the business faces in terms of asset-liability management.*
How are you meeting long-dated liabilities given the shallowness of many Asian markets?
It isn’t easy. In most Asian markets currency hedging is only available on exposures of up to 10 years. Many also have regulatory regimes that limit what percentage of assets can be invested offshore, and offshore assets typically have higher risk charges. So while reaching into offshore markets would seem the way to go [to match liabilities], there are so many restrictions that we are doing this to a lesser degree than you might expect.
So you are permanently rolling over your fixed income exposures?
Correct, and that exposes us to a mismatch that we have to manage carefully. In certain countries where long-term assets are not available, we restrict ourselves from writing long-term business. We have to decide how much of a mismatch risk we think it is responsible to bear. That steers not just our investments, but our business mix and what kind of policies we want to sell.
How are you managing this mismatch?
This is the big challenge for life insurers in many countries including Asia. We have had very low interest rates in Taiwan for years, now we have that in Korea, and in Thailand and China rates are also coming down. It means we can’t just look at investment. The solution cannot simply be to take on more risk and hope to compensate. Increasingly we are looking at the product mix, and this is group-wide.
Are you going down the risk curve in fixed income?
In Asia we are more or less in investment grade, mostly government bonds. One reason is that the corporate credit market in most Asian countries is not deep enough. Often for long maturities only government bonds are available. But in certain markets we have 20-30% in corporate bonds, still largely investment grade.
Have Asian governments done enough to deepen their capital markets?
We have to acknowledge this will take time. Definitely there has been progress in extending maturities, for example in China a 50-year government bond is available, and there are a lot of 20- or 30-year government bonds in Taiwan. But on the corporate side the market needs to deepen. We see some positive signs, it is not that it is getting more difficult. But we are far from the ideal.
What is the greatest challenge in meeting your long-term liabilities?
Products have been sold for decades that never caused any problems and enabled insurance companies to grow. But in this low-interest-rate environment, many of them have become challenged, and we have to manage overall risk for the company. We have to decide whether we should sell them any more, or whether we should lower guarantee levels.
But these are products that we are used to selling and that the market requires. We cannot disregard these business concerns. We need to draw a line to say we will no longer accept certain product features in a given environment. In an extreme case you take certain products off your shelf, and so for a time there will be a negative impact on sales, at least until you come up with replacements and create a new market.
From this perspective unit-linked business is very attractive and we try to promote it. There are some markets – Taiwan, for example – where unit-linked is big business and growing. But there are others where it does not exist or is tiny. Realistically it takes a lot of effort to build this business.
*An extended interview with Loeffler appears in the upcoming (March) issue of AsianInvestor.