AXA, Sun Life look to derivatives, alternatives and ESG to shape 2030 portfolio

As asset owners continue to grapple with an uncertain world of runaway inflation, unpredictable monetary policies, and a relentless pandemic, insurers in Hong Kong also have to manage new financial reporting and solvency assessment requirements, panellists at AsianInvestor’s Insurance Investment Breakfast Briefing said on Friday (December 3).

“With RBC and IFRS 17, there’s a lot of talk about length and duration, we talked about the clever tricks, derivatives and everything. But with a rising rates environment, you actually want to do it as late as possible,” Shiuan Ting (ST) van Vuuren, chief investment officer of International HuBS at Sun Life said during the panel discussion titled ‘Building 2030’s portfolio today’.

“We looked at how much later can we take those actions and are we going to have enough time to execute because you can’t execute hundreds and millions of US dollars or billions in a day or a week. It’s going to take weeks if not months, so it’s going to be very challenging in 2022 to deal with this ever-changing environment,” van Vuuren said.

RBC refers to the new Risk-Based Capital solvency framework that the Hong Kong Insurance Authority (IA) is moving towards, while the IFRS 17 refers to the new financial reporting standards for insurance contracts.

Insurers expect to put in resources to adapt to the new regulations – a 2019 Deloitte survey of insurers found that 89% expected to hire additional resources to meet the RBC reporting requirements, and 33% expected to need new systems to meet those requirements.

At AXA Hong Kong, Richard Chan, chief investment officer and head of the ALM investment department said that the investment team uses three key pillars in their 2030 portfolio: derivatives, alternatives and ESG (environment, social and governance).

The insurer does rely on derivatives “in terms of amount and sophistication… to manage our budget,” he said.

On alternatives, he said AXA has mid-market loans and timber in their portfolio.

“We diversify to alternatives and we invest in so-called alternative square, which is alternatives within alternatives,” he added.

AXA has been doing ESG “for quite a long time, more than 10 years,” he added. “These may not have short-term value but it significantly reduces our long-term transition risks.”

Both senior executives said that having neutral durations have helped buffer the impact of interest rate uncertainty.

“I have always kept zero duration even from the beginning,” Chan said, “So when interest rates go down, and we don’t know if it will stay that way, and now people anticipate interest rates going up, but we don’t know when or how much, [we are less affected].”

“On the liability driven side, in the next one year we expect the liability duration to be increased. And then on the investment side, we have to make decisions... Typically, we have around three to six or nine months to try and meet that gap. So duration is one that we will maintain neutral on duration target,” van Vuuren chimed in.

She added that even though she is a fan of private credit, “I don’t see insurance companies being able to go 100%”.

The insurer, being headquartered in Canada, taps a North American asset manager to access some private fixed income assets, she said. In Europe, she observed that asset owners such as pension funds and insurers have stepped in to fill the infrastructure debt gap since banks now sponsor fewer infrastructure projects than they did before a decade ago.

However, in Asia, she observed challenges such as fragmentation and immaturity of the markets. “There is not enough supply coming through,” she said. “But the demand in terms of insurance money is definitely there.”

In terms of a hopeful target allocation percentage for alternatives, “10 to 20% feels like the right number that you want to get to, and 40 to 50% is probably the absolute upper bound, so the answer is somewhere between those ranges,” she added.

There is no timeframe for that goal, although she said: “I would have liked to get there yesterday”.

Insurer asset allocation has been driven by regime changes and the low yield environment over the past decade, said Max Davies, insurance strategist at Wellington Management said at the same panel discussion.

“The key antidote insurance companies have used in a low-rate environment is alternative investments,” he said. “There is the possibility of an illiquidity premium, and the RBC regimes don’t recognise liquidity as a risk driver to the capital charge, so it does make a lot of sense for insurance companies to invest in these assets, particularly life insurers that don't necessarily need the liquidity and have a certain appetite for illiquidity.”

Quality is one of the key drivers in capital charge, and there has been rising interest in new investment-grade private placement markets in the US, he added.

However, he also pointed out that there will be a limit to how much insurers can invest into because of the need for quality, as well as RBC regimes that “are changing how insurers invest”.

In Europe, for example, regulators have introduced capital relief infrastructure debt which opens up opportunities, and similar themes are emerging in Korea, Hong Kong and Singapore “as governments need support in financing their infrastructure needs,” he said.

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