Malaysian life insurance companies are doing whatever they can to find the right risk-adjusted returns outside the domestic stock market — and fixed income, private assets, and loopholes to expand overseas exposure are among the tools to achieve this.
Malaysian life insurers are limited to investing no more than 10% in overseas markets, of which 5% can be in stocks. And that limit is being pushed, the audience heard at AsianInvestor’s Malaysia Global Investment Forum in Kuala Lumpur on November 7.
While fixed income is the mainstay of the insurers’ investments, they are increasingly diversifying into private market assets.
“The private markets and assets really give us so-called value, for the main reason that there is less volatility,” Amar Ramachandran, director and head of investment at Manulife Insurance Malaysia, said on stage.
The insurer has invested in private equity and private debt, all of it overseas. Even at 10% allocation, the benefits are noteworthy.
“Private assets can be significant for our actual returns, given how ringgit-denominated public equity and bonds have been doing. And we have been neutral or just under neutral insofar as we have invested in Malaysian public equities,” Ramachandran said.
Another insurer, Generali Life Insurance Malaysia, is also seeing a similar trend. While fixed income is the cornerstone of investments, private markets are turning out to be an alternative to public equity for diversification and achieving a return edge.
“From an accounting perspective, private equity makes sense, because the P&L impact will bring lesser volatility due to the valuation of this particular asset class,” Alex Chin, head of investment, Generali Life Insurance Malaysia, said on stage.
For insurers under the current solvency regime, it is quite expensive to invest in private equity in terms of risk-based capital (RBC) requirements, Chin pointed out.
“Having said that, if the expected returns of private equity can offset these charges, it is worth considering. Going forward, I expect there will be more Malaysian asset owners focusing on exploring private equity – from the P&L volatility perspective,” he added.
Within private debt, Manulife’s Ramachandran even sees potential for the emergence of a Malaysian market for the asset class.
“Private debt is also done in foreign markets currently, but I believe that it will probably be easier to get ringgit-denominated private debt in Malaysia than private equity, in the current landscape,” he said.
To push the boundaries of the 10% cap in overseas markets, Manulife Insurance Malaysia has turned to getting additional foreign exposure using a ringgit note.
With the approval from the Malaysian central bank, Bank Negara, the investments are done in a structured note format, so Manulife will not be limited by the 10%, and specifically the 5% foreign equities limit.
“By doing that, we can shift out of Malaysian public equities by holding a ringgit note that gives you the return from the S&P 500,” Ramachandran explained.
He noted that the expected assumption of 9-10% long-term returns for Malaysian public equity have not really materialised during the last decade on the Bursa Malaysia.
“Maybe we can still get 3-4% dividend returns, but the growth element of 5-6% that we previously imputed to give the Malaysian market 9-10% returns is really not there,” Ramachandran said.
He pointed out that the S&P 500, when looked at over a 50-year horizon, has been giving a return of close to 10%.
“Of course, there is volatility in the S&P 500, but on a risk-adjusted basis I think we are still better off than in the Bursa Malaysia,” Ramachandran said.