An insurance group diversifies into alternatives

Axa Asia has life and property & casualty insurance businesses in China, Hong Kong, India, Indonesia, Malaysia, Singapore and Thailand. It has life but no P&C business in the Philippines, and neither life nor P&C in Taiwan, but is seeking a licence for a life business there.

These two arms account for $13.3 billion in assets under management, with life representing the lion’s share of $12 billion.

In Asia, Axa used to run its life and P&C businesses separately. But after the sale of its Australian business to AMP Capital in 2011, Mike Bishop became regional CEO and Arnaud Mounier CIO for the combined life and P&C businesses in April last year.

Q How are your assets managed in Asia?

A We have local investment teams for all life entities and for the largest general insurance entities, which I oversee for the region. Apart from Hong Kong and Singapore, all assets under management are domestic, so it makes sense to have local teams who know the local markets well.

Q What’s the breakdown of AUM in Asia?

A The life general-account assets account for $12 billion of the regional AUM, and Hong Kong is easily the biggest slice, with $8 billion in assets, followed by Thailand with $1.7 billion.

But the $200 million in the Hong Kong P&C business is expected to double with the purchase of HSBC’s Hong Kong and Singapore P&C business by Axa, due to complete in November. HSBC’s Singapore P&C AUM is smaller and will add $75 million to Axa’s $450 million.

Q What are your investment objectives?

A For P&C, we try to optimise earnings within risk and solvency constraints and invest mainly in bonds and other very liquid assets – it’s fairly simple and we want to avoid unnecessary sophistication at this stage. Most of our time is spent on the life account, and asset-liability management [ALM] is our main consideration.

Under Solvency 2 [the European capital-adequacy regime for insurers], we have strong incentives not to make significant currency bets, which are very capital-consuming. Reducing duration gap [the difference between the maturity of a firm’s assets and its liabilities] is also a priority, as the capital charge under Solvency 2 is quite prohibitive.

Q How is your portfolio broken down by asset class?

A To give an aggregated number at regional level: on the life side we have about 15% in listed equities, 45% in corporate bonds, 30% government bonds, 5% in money-market instruments, 4% in policy loans and about 1% in alternatives.

On the P&C side, it’s more vanilla. We have 35% in government bonds, 15% in corporate bonds, 3% in equities and 47% in money-market instruments.

Q How is your allocation changing?

A We are increasing our alternatives allocation for diversification purposes and to be less dependent on equity volatility. This includes private equity, infrastructure, hedge funds and real estate. We can afford to trade some liquidity for a bit more yield and diversification.

We are reducing our listed equities exposure from a fairly high level. Three to four years ago, we had a 20% allocation to stocks across the region, but now we are down to 15%, and I expect that to fall further as we move more into alternatives, particularly in Hong Kong but also in Singapore.

On the fixed-income side we have quite significantly increased our exposure to corporate bonds versus government bonds and we’ve done some more sophisticated trades.

Q Does that impact your portfolio’s liquidity?

A In the medium to long term, holding government bonds such as US Treasuries in our portfolio makes sense for us, but we don’t need daily or even weekly liquidity. So we’ve done collateral exchanges, such as swapping US Treasuries for non-liquid assets on banks’ balance sheets, like ABS or CDOs, and get a premium in return for providing that liquidity.

Q How much do you plan to put into alternatives?

A We started investing in alternatives two years ago, and it’s very much a work in progress. Currently only 1-2% of the Hong Kong and Singapore life portfolio is in alternatives, but we have been increasing it and plan to raise that figure to 8-10%, with around 4% in property, 3% in PE and 2% in hedge funds. But it will take at least two years to get there.

Q Where are the assets based?

A Our hedge funds and PE exposures are largely non-Asian assets – it’s a mix of US and some European assets. The pipeline for private equity is just starting in Asia, which is also a very small market for hedge funds. But for real estate, we are looking at opportunities in this region.

The quality of hedge funds varies widely in Asia, so we’re not allocating massively to them in this region at the moment. Our approach is not to invest in Asia for the sake of investing in Asia. A strong track record and solid risk management infrastructure remain the primary criteria when selecting hedge funds.

Q You do it via funds of funds?

A We have asset managers selecting funds for us. We leverage the strengths of the Axa Group’s two asset managers – Axa Investment Managers and AllianceBernstein – for equities, bonds and alternatives. For example, we use Axa Private Equity and Axa Real Estate, and the hedge fund capability of both Axa IM and AllianceBernstein.

Q What proportion of your assets is invested in Asia?

A Most of our Hong Kong assets are invested in the US where the markets are deeper. The currency and interest rate mismatch risks are manageable via derivative instruments. In addition, there is still a yield pick-up versus local HKD-denominated bonds.

Bond issuance is also limited in Singapore, especially from corporates, so since late last year we have felt the need to enter other markets, such as dollar-denominated Asian and US corporate bonds.

Q Will your other Asian portfolios buy more foreign assets?

A In Thailand, we would like to start investing overseas in the coming months. Local rules allow insurers to invest a portion of their portfolio in offshore assets, but they have to be 100% currency-hedged.

Our aim is to build a derivatives capability in Thailand to hedge FX risk, and we will start to be more active in offshore investments there by the end of the year.

Investing in US dollar-denominated Asian bonds could be interesting – other institutions in Thailand have done this already. Our Thai operations started to reach a significant size three years ago, so then we felt the need to find alternatives to the local market.

Q What’s the breakdown of the Thai portfolio?

A Around 10% of the Thai portfolio is invested in domestic equities, with the rest in bonds being a mix of government and corporate bonds. There is no plan to invest in foreign equities any time soon. I hope down the road we can invest in domestic property and private equity, but that’s still a few years away.