Shin Kong Life CIO resigns over record losses

After spending five-and-a-half years turning a family dominated business into a formidable investor in Taiwan, Ian Lui, the influential CIO at Shin Kong Life, has tendered his resignation and is in the process of moving back to Hong Kong.

In an internal announcement, Julian Chiu, current deputy CIO at the insurance firm, has been named an official replacement to Lui. In fact, sources say Chiu has been in a de facto CIO role since January, when Lui stopped attending committee meetings. Chiu's promotion to running the NT$1.13 trillion ($32 billion) investment portfolio had followed a 30-year tenure with the firm. Prior to his promotion to deputy CIO, he had been head of overseas investments and secretary to the group chairman's office.

Upon Lui's arrival in 2003, Taiwan's insurance industry had been struggling against a decade's worth of negative spreads. At the time, up to 10% of Shin Kong's asset portfolio was in cash, with 97% of its bond holdings invested in triple-A rated securities. Under Lui's helm, Shin Kong was the first insurance company in the industry to bite the bullet and restructure its investment team. Lui hired JPMorgan as an advisor to set up an asset-liability management team and optimise Shin Kong's asset allocation outlook.

Under Lui, total AUM was boosted from around NT$600 billion ($17 billion) to NT$1.13 trillion ($32 billion) post-credit crisis. Today, the firm has about 8% of its portfolio in real estate, 6% in mortgage and corporate loans, 11% in policy loans, 3% in foreign equities, 28% in foreign fixed income, 29% to domestic fixed income, 5% in domestic equities and 10% cash.

In the end, however, one of the many changes credited to Lui's name, would prove to be the final blow that tainted his track record.

Lui will be remembered as the pioneer who first introduced CDOs to Taiwan's institutional community. Shin Kong was also the first in Asia to invest in synthetic credit-default swaps linked to zero-coupon, triple-A bonds. In 2005, Shin Kong was the first to buy CDS using securitised portfolios like US residential mortgage-backed securities. At the time, Shin Kong had the largest structured credit portfolio among Taiwanese institutions and boasted the best overall investment returns in the industry.

For this, in 2006, when AsianInvestor named Shin Kong the institutional investor of the year, and the family behind the Shin Kong group was tremendously satisfied with Lui's successes in turning around the company's balance sheets. That year, Shin Kong broke its all-time profit record, reporting earnings of NT$11.3 billion ($323 million) and was cited by the local regulator as a model insurer in the industry.

However, by the end of 2008, the global retrenchment of structured products, caused Shin Kong Financial, the company's parent, to suffer a record loss. According to its fourth quarter results announcement on Thursday last week, the life insurance businesses lost NT$19.74 billion ($564 million) in 2008 -- NT$1.37 billion ($39 billion) of which was losses from CBO investments, NT$5.47 billion ($156 billion) from CDOs, and NT$12.55 billion ($358 million) from foreign exchange hedging costs. Overall return-on-equity on Shin Kong Life's investment portfolio was down 48.6%.

A strategic investor, Dai-ichi Life from Japan, had to be brought in to help recapitalise the company's balance sheet. Dai-chi helped Shin Kong raised NT$8 billion ($228 million) through a private placement -- which included NT$6.3 billion ($180 million) in the Shin Kong Financial Group, and NT$1.7 billion ($49 million) in preferential shares in Shin Kong Life. The Japanese insurer now owns 14.9% of all outstanding shares of Shin Kong Financial.

However, it is important to note that under Lui's tenure, Shin Kong never had a year of negative investment returns. In 2004, his team delivered 5.2%; 5.1% in 2005; 5.3% in 2006; and 4.1% in 2007. Even amid the financial crisis in 2008, his investment team delivered a positive return of 2.0%.

Privately, since the onset of the subprime crisis, Lui has expressed his disillusionment with conventional rating agencies and talked about the need for a reformed model to emerge. Now that he has left Shin Kong, his friends say that it is possible he will pursue his goal of setting up his own investment rating and advisory business back in his home city.

Lui earned his bachelor degree from the University of Western Sydney and has an MBA from the Chinese University of Hong Kong.

Between 1987 and 1999, he worked for HSBC Investment Bank as an investment services manager; a portfolio manager at Daiwa International Asset Management and National Mutual Funds; director and senior fund manager at Dresdner RCM Global Investors; and managing director at Indocam in Singapore. His last role before being poached by Shin Kong was CIO and managing director for Asia-Pacific at Allianz Asset Management.

According to Victor Hsu, the company's president in Taipei, Shin Kong will work to enhance its risk management capability. A plan of implementing the first phase of the 'Algo' risk management system will be completed by April.

Meanwhile, the company will maintain a 5% long-term investment return target. The company will maintain the share of traditional hedges at 60% to 80% and continue to monitor developments of global markets.

The company expects to see continued volatility in global equity and credit markets. However, it will focus on tactical opportunities -- many of which it believes will be in real estate.