Putting a greater focus on ALM

As chief executive and chief investment officer for Asia at Allianz Investment Management based in Singapore, Bernd Gutting oversees the $25.6 billion in general account assets and $12 billion in unit-linked assets (as of March 31) for German insurer Allianz’s Asian businesses.

In order of size, the firm’s Asian life businesses are in Korea, Thailand, Taiwan, Malaysia, Indonesia, China, Sri Lanka and Laos – and include a joint venture in India. Allianz also has property-and-casualty businesses in India, Indonesia, Malaysia and Thailand.

Gutting has been with the group for 25 years, and his other roles have included managing director and group CIO at Allianz IM, and Germany CEO of Allianz Capital Managers.

Q How is your general account broken down by asset class?

A Given that our life portfolios are liability-driven, our main allocation (90-95%) across the region is to fixed income, but the exact proportion depends on each country’s solvency rules and the local business’s product offering.

Our regional allocation to equity is comparatively low, at around 2-4%. The exception here is our life business with profit participation in Malaysia, where the allocation is closer to 20%. This is owing to the characteristics of our products there, as well as to competitive positioning.

We also allocate 2-3% to property and alternatives. The rest is in cash.

Q How is your fixed income portfolio broken down?

A Again, it depends on the country. Usually the bulk is invested in sovereign and quasi-sovereign risk, as this provides duration. Corporate debt accounts for 15-30%.

We generally do not manage our fixed income portfolios very actively, as there are only a few countries in Asia with liquid secondary bond markets.

Q Is the liquidity situation improving?

A Not really. If you look at the fiscal situation in the countries in question, they are running a budget surplus or a relatively small deficit, so governments in Asia don’t have a great need to issue bonds. Corporate issuance has been quite weak as well. And as life insurers and pension funds are growing fast, there is much more institutional demand than there is supply.

But at least regulators are becoming more open to allowing investments in offshore bonds, although exposure limits vary substantially across the region – from 10% to 35%. However, many Asian insurers are not close to hitting their foreign investment limits, probably with the exception of Taiwan, where there is a lot of pressure to raise the thresholds.

Q So broadly how are you dealing with the low-yield environment?

A We are facing the same dilemma as most of our peers. All over the region interest rates are fundamentally too low – looking at GDP growth rates and inflation – and credit spreads are far too tight.

On the other hand, you cannot afford to be invested in asset classes that do not provide a current income – after all, you have to keep the promises you have made to your policyholders. The most we might have in cash would be 3-4% of our portfolio.

So everybody is looking for yield. And some of our competitors seem to be quite aggressive in pursuing these opportunities. But our approach is quite conservative – we only invest in investment-grade assets. And as far as we invest offshore, we would not accept any open currency risk.

Q Have you made or would you like to make direct loans to achieve better yields?

A Yes I would, and in the retail space we already do in some countries, in the form of policy loans or mortgage loans.

In particular, making corporate loans directly requires considerable scale, to justify the build up of resources required for this business, which we do not have in Asia. So we would have to rely on a small number of strong banking partners, either domestically or regionally.

Unlike in Europe, banks in Asia still have the capacity to keep that business – or at least the more attractive parts of it – on their own balance sheets.

Q Have your general allocations changed recently or do you expect them to, and if so why?

A I don’t expect any significant changes overall – nothing like a +5% or –5% change in allocation in a certain area. Not that I don’t want to see that – for example, maybe we have too much government paper in some of our portfolios. But to make substantial changes, we would need to see deeper and broader secondary markets, particularly for corporate credit.

Q Are you looking more at alternatives?

A As a general principle, assets that offer us a premium for accepting liquidity risk, such as infrastructure debt, are very attractive additions to our fixed income portfolios. Unfortunately, Asian infrastructure markets are not very developed – banks normally keep these assets on their balance sheets; they have no need yet to offload them.

Property is also interesting, especially direct investments, but these assets are more opportunistic in nature. In some countries it will take our asset portfolios a couple more years to grow to a size that allows for a real estate strategy that deserves that name.  

Q What sort of time frame are you thinking for boosting alternatives exposure overall?

A It will take time; four to five years perhaps. We can’t invest when we’d like to – we have to wait for those deals to come to the market.

Q How much do insurers have in offshore assets?

A In Taiwan it’s probably 30-35%, in Korea it is closer to 5%, and in other Asian countries it’s almost zero. That’s because of both regulations and the economies themselves. For example, in Indonesia we can get 8-9% ‘risk-free’, so why should we go offshore to Malaysia or Thailand?

Q How do you use external managers?

A For the liability-driven part of our portfolios, it really does not matter too much if you manage the portfolio yourself or have a specialist investor doing it for you. These portfolios do not offer much room for active management and do not justify high management fees.

In terms of our actively managed portfolios, as a general rule we would look for a specialist asset manager. The preferred providers would be those from within Allianz Group – both Pimco and Allianz Global Investors can offer expertise and value here, but not in every country and maybe not in every asset class.

In such cases, we will also consider external managers. In some countries they are easier to find than in others, which is why, for example, in Indonesia, Malaysia and Thailand we manage most assets ourselves. In India, the regulator does not allow the outsourcing of asset management mandates at all.

Q How big is your investment team?

A We have close to 100 investment staff across the region – accounting for less than 3% of the regional insurance headcount.

Q It’s been more difficult for insurers to match assets to liabilities in the low-yield environment of the past couple of years. How have you dealt with this issue?

A We have definitely put more emphasis on ALM in the past three years in Asia. This reflects developments within Allianz Group. We have to follow global requirements, processes and models, all driven by Solvency II, and these are getting rolled out worldwide.

We are building a team of ALM experts in Singapore to support the various local investment and product development functions. Currently the Singapore team comprises four ALM specialists – we feel that this is sufficient, but that over time we will need more strong capabilities in each local market. It won’t be the smartest way to do it all centrally out of Singapore.