China Life, Manulife emphasise fixed income tilt amid rate, regulatory shifts
China Life Insurance Overseas and Manulife Asia will continue to tilt their portfolios towards fixed income assets into 2024 given expectations for a high-rate environment and changing regulatory and accounting rules for insurers.
Senior investment executives from the Asian life insurers noted assets like private credit offer more diversified global income-generation potential in the current high-rate environment.
Under the assumption of interest rates staying higher for longer, Courtney Wei, deputy general manager of investment management at China Life Insurance Overseas said: “The shift towards fixed income, even within alternative space... I'm more leaning towards the view that this trend will stay here for longer.”
“That's one of the things very important to our longer-term asset allocation. And with that, it explains our view for next year: higher rates and continuing to tilt towards fixed income type of assets,” Wei told a panel discussion at AsianInvestor’s Insurance Investment Briefing Hong Kong on Wednesday.
While supply chain shifts add to inflation, Wei said the bigger inflation driver globally may be advances in generative artificial intelligence (AI) technology and its impact on productivity in the long run.
If those technologies can lead to higher growth rates, then rates could be higher for longer, she noted.
China Life Overseas is the offshore insurance arm of life insurance giant China Life Insurance.
NEW RULES
The emphasis on fixed income-type assets is also driven by the new risk-based capital (RBC) regulation in Hong Kong and new accounting rules under International Financial Reporting Standards (IFRS) 9 and 17.
The Hong Kong RBC regime is expected to come into effect for insurance companies in 2024, which necessitates capital reserves proportional to mark-to-market risks. Meanwhile, the new IFRS rules require greater transparency around insurers’ financial assets and liabilities.
Wei noted that these reforms have prompted China Life Overseas to look at RBC-adjusted returns rather than the risk-adjusted returns used previously.
This led to the shift to fixed income and away from equities, which bear higher risk and thus higher capital charges.
This approach also affects the life insurer’s appetite for external managers.
Before the arrival of RBC and the new accounting rules, the firm stuck with a hold-to-maturity (HTM) mentality and looked for absolute returns each year, which required managers who could make the right long-term bets to keep the portfolio away from credit risks.
“In the future, we're not saying we can’t have HTM anymore. But we will need managers to be able to manage NAV (net asset value) because we will be more transparent, and NAV-based (under the new rules).”
Within private credit, Wei said China Life Overseas’s risk appetite centres on first-lien credit while continuing to diversify.
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It is also weighing deploying capital via staged commitments versus immediate secondary market purchases.
This is to make sure the company gets into the right vintage, even as some managers they engaged with offered mid-teens level of returns, she shared.
DIVERSIFICATION
Cary Chan, Hong Kong and Southeast Asia head of investments for general account investments at Manulife, shared that the insurer had also been diversifying globally pre-pandemic and reducing market correlation.
This applied to global public and private debt investments, aimed at cutting reliance on any single market for deal sourcing or yield enhancement.
On the non-fixed income side, Manulife Asia has been diversifying away from local equity markets and into international equities, while adding to private equity, infrastructure, and real estate investments.
“All that has cushioned the mark-to-market impact on the fixed income and equities last year and allowed us to continue our pace of investment,” Chan told the panel.
Sharing the view of having higher rates for longer, Chan said Manulife Asia is also more focused on longer-duration fixed income to match liabilities.
The Canadian life insurance company had been investing in US private credit for many years and has recently developed an appetite for the European market.
Also speaking on the panel, Richard Chan, chief investment and asset-and-liability-management (ALM) officer at FTLife said he has refrained from interest rate bets, focusing on asset-liability duration matching. Asset allocation strategies are driven by risk premiums, he said.
FTLife is the insurance business of Hong Kong conglomerate New World Development.
“If, as Courtney said, there's a long-term trend, such as AI, it could affect how different asset classes behave in the long term,” FTLife’s Chan said.
“If that happens, it will result in my portfolio investing into more or less of the different kinds of risky assets,” he said.