Hong Kong insurers look to make the most of market turmoil
Rising interest rates and falling equity markets have been the results of several shocks to the global economy in the first half of this year, particularly the Russia-Ukraine crisis, Covid-19 lockdowns in China and the onset of a sustained period of inflation .
Insurance companies have had to adjust to the new environment, chief investment officers from the sector told AsianInvestor’s Insurance Investment Briefing in Hong Kong on June 29.
Some of the CIOs at the event spoke about holding fast to the principle of diversifying as markets change. With that fundamental about strategic asset allocation in mind, they see positive elements in the shifting markets.
“I don’t really have a favorite asset class. Like my children, I treat them all the same. Right now, I can come up with a business case for each asset class much easier than I could at the start of 2022,” Shiuan Ting van Vuuren, chief investment officer of Sun Life International HuBS, said.
She added that falls of some equity markets by a double-digit percentage this year have made it possible to achieve better returns. Simultaneously, increasing interest rates make fixed income more appealing again.
“When corporate bonds were 2-3%, we as a life insurance company didn’t have much of a choice. Rising interest rates are generally good news for insurance companies. It’s more exciting when you are in a world of 4-5% rates versus 2-3%,” van Vuuren said.
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NEW ALTERNATIVES
Alaric Lau, CIO of CMB Wing Lung Insurance (CMB), a property and casualty (P&C) insurer, is also looking to diversify his company's asset allocation towards private markets and alternative investments.
Inflation is generally making CMB hold fixed income assets for shorter periods, since P&C insurers already prefer a portfolio with assets of a shorter duration and are more liquid compared to life insurers, Lau explained.
Although an investor would expect to hold alternative investment assets for longer and their returns are fixed compared to equity, their advantages as a hedge against inflation and stable returns makes the asset class attractive for any portfolio.
“Right now, we are looking into, at an early stage, alternative investments with a longer duration or lockup in terms of funds [vehicles] within infrastructure or private lending. That would provide a more stable net asset value versus a more stable annuity for us to diversify from what we have right now,” Lau said.
MORE TO OFFER
William Chan, CIO of HSBC Life Insurance, also views alternative investments, especially private equity and private credit, as attractive during the market turmoil at the moment.
“These asset types are of course much less liquid compared to, say, listed equities, but although it has been compressed over the last few years of strong demand, there is still a liquidity premium,” Chan said, referring to the additional compensation often required to encourage investors to buy assets that cannot be easily and efficiently converted into cash at fair market value.
Chan pointed out that interest rates are still low compared to other eras, though they have risen recently. He doesn't believe markets are necessarily moving out of a low-interest rate environment. He pointed that money has been potentially free in the EU because of negative rates.
“By historic standards, even relative to what has been priced in by the market, money is not particularly expensive compared to historical scenarios. When you look at the nominal or real rate, we are just bouncing back 10 years, with real rates going from negative 1% to 0.6-0.7%. That is, by no means, a very expensive cost for money. That means we still need to find other sources of return to push our long-term expected risk reward,” Chan said.
He added that as well as providing a risk reward, alternative investments can actually have an advantage of not being marked to market - the measurement of the fair value of assets that can fluctuate over time. The duration of these investments, typically five to seven years but sometimes longer, helps them avoid volatile markets.
“Equity markets can take major up- and downturns, but you miss all this volatility and see a subsequent catch-up. That, by itself, is not a bad thing and is, to me, an area where it is very sensible to continue to deploy capital for long-term investors like us insurers,” Chan said.
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