Axa Life Asia to use derivatives to aid ALM

The Asia ex-Japan division of French insurer Axa Life substantially increased its portfolio-hedging activity and doubled its staff count in this area in 2009. That has helped it navigate the extremely volatile markets of the past year, says Alistair Brown, chief financial officer for Asia ex-Japan at Axa Life.

Having thus successfully leveraged the derivatives expertise of other parts of its parent group, the next step for Axa Life Asia is to use derivatives to lengthen the duration of its portfolio. The reason for this is that it's particularly tough for life insurers in Asia to match their assets to their liabilities (ALM), thanks largely to the dearth of long-duration (15-year-plus) bonds.

The insurance group hasn't used derivatives for this purpose in Asia yet, although it has elsewhere, says Brown, who took up his current role in October. He says he's not close enough to the work being done to give any specific examples.

But he does say it could happen in the next six months. "As the group gains more experience [in using derivatives to gain duration]," he says, "that's something we'll leverage off."

The fact that the Axa group appointed its first group chief investment officer late last year has also helped develop investment and hedging capabilities. The new man -- Jean Sorasio, Tokyo-based CIO for Axa Japan -- is developing better communication between individual regions and entities. "So if someone's had success with a structured product or with some sort of derivative overlay, that will be shared," says Brown.

That will help the Asian life unit, which is less experienced than entities in some of the more mature markets in terms of ALM, he says. "Of course we've brought in people to give us experience in different areas, but we have a lot to learn and leverage from other parts of the group," adds Brown.

But the firm has been building up its derivatives capability. On the hedging side, it had two people in Asia ex-Japan at the start of 2009, and there are now four, although the unit still executes via Australia. It has been doing a lot more hedging of interest rates, currencies and equities, says Brown.

Something that has also helped in this area is the hire of the first regional CIO for Asia in the first quarter of this year, he adds. In the past, the unit had a regional chief actuary, to whom the investment and risk management teams reported. Those teams are now separate, reporting respectively to regional CIO Arnaud Mounier and regional chief risk officer Mark Stamper, both of whom report to Brown.

One reason Axa Life Asia built up its hedging team was to help risk-manage the variable-annuity (VA) product it launched in Hong Kong in the second quarter of 2008, says Brown. These relatively complex products have met with success in the US and Japan and are also increasingly appearing in Europe.

The hedging team in Hong Kong is also leveraging the expertise of Axa Hedging Services in Singapore, says Brown. This is a dedicated resource of the Axa group that manages VA-hedging programmes around the region, including Australia and Japan.

The VA product has become a significant contributor to Axa Life's Hong Kong business, says Brown, but he would not give any figures. And while some key players in the industry have withdrawn their products from the market because of the extremely volatile markets in the past two years, he adds, Axa has been able to keep this business open thanks to its strong hedging capabilities.

See the May issue of AsianInvestor magazine for an extended interview with Alistair Brown and more detail about the Axa Life Asia's plans to diversify its portfolio.