Transamerica Life Bermuda exploring PE, private credit options

Transamerica Life Bermuda (TLB), a life insurer operating in Hong Kong, Singapore and Bermuda with a primary focus on the wealth segment, is considering adding alternatives assets to its investment portfolio, a senior executive said.

“Currently, our exposure to alternative investments is limited. However, we are actively exploring the viability of private equity investments,” Ing Tai Ching, chief financial officer of TLB, told AsianInvestor.

“Despite this, we remain cautious due to the illiquid nature of this asset class and the potential liquidity strain from higher interest rates combined with increased policy surrenders and redemptions.”

With its existing investment portfolio being highly liquid, Ching, who is based in Hong Kong, believes there may be opportunities to further optimise both liquidity and returns through strategic alternatives investments.

“Given the current landscape of high interest rates and our existing liability profile, we are exploring allocation towards structured assets and private credit,” he said.

“These options provide an appealing risk-adjusted return that aligns well with our balance sheet risk. Additionally, they enhance diversification within our credit investment portfolio.”

TLB focuses on life insurance for high net worth individuals (HNWI) and has expertise in HNWI wealth protection.

It is part of the Aegon group, an international financial services group. While TLB is incorporated in Bermuda, Aegon is headquartered in The Netherlands.

It has about $7.3 billion in total assets at the end of December 2023. It launched operations in Hong Kong in 1993 and in Singapore in 2006.

TLB’s general account assets are primarily managed by Aegon Asset Management.

ALTS APPEAL

The insurer’s desire to explore more alternatives investing dovetails with what other insurers have told AsianInvestor in the past 12 months.

These include AIA, FTLife and Sun Life Philippines.

A recent report by Mercer and Marsh McLennan reveals a surge in global insurers looking beyond traditional fixed-income investments in 2024, with a particular focus on private debt and alternative assets.

Reasons for the interest include a growing desire to diversify and spread risk across assets classes, mitigate volatility and invest in specific instruments with varying risk-return profiles and align with long-term liabilities.

TLB’s current asset allocation is typical for life insurers, adopting a stable long-term approach.

“Beyond considering the qualitative outlook of asset classes, we conduct thorough quantitative analyses to develop an efficient frontier that maximises risk-adjusted returns, guiding our allocation decisions,” said Ching.

TLB’s asset allocation is heavily weighted towards investment-grade corporate bonds in both public and private markets.

“Additionally, our allocation includes some exposure to high yield and emerging market fixed income, with a strong emphasis on individual security selection; municipal bonds and various structured assets that offer attractive yields and diversification and holdings in treasuries and cash equivalents for liquidity,” he said.

“We do not focus particularly on equity investments, as our portfolio does not have high-equity backed participating products.”

Participating insurance plans allow subscribers to share in the profits made by the insurance company, which are distributed in the form of bonuses or dividends

Ching did not provide a quantitative breakdown of the insurer’s asset allocation.

NEED FOR LONG DURATION

With evolving regulations - and there are quite a few for insurers to contend with – private market assets offer prospects of risk-adjusted returns for longer time periods, according to experts.

A new risk-based capital regime (introduced in July) and updated IFRS regulations are among the most commonly cited by insurers as the most significant for investment operations.

“With the rise of risk-based solvency regimes across global regions – including Hong Kong, Singapore, South Korea, and others such as Japan and Taiwan on the horizon – ALM is rising up insurers’ agendas. With it, the need for high-quality, long-duration, predictable cash flows is becoming a structural phenomenon driving a substantial increase in demand for longer duration instruments, a February note from Schroders said.

Even with the prospect of a US rate cut over the next few months, interest rates are higher than they were a few years ago.

“At higher interest rates, corporations, particularly those with cash, are less likely to want to lock in [issuances with] longer term rates. Indeed, long-term fixed income issuance declined 34.2% from June 2022 to June 2023.

“The trend is likely to persist over the secular horizon in a world of higher interest rates. As such, illiquid assets will need to be a larger component to deliver attractive returns with a good match for long-dated liabilities,” the note added.

PROCEED WITH CAUTION

As with most asset owners, TLB is approaching the next 12 months with caution.

“The prevailing uncertainty surrounding interest rates, coupled with high inflation, economic slowdown, geopolitical tensions, conflicts, global elections, and trade issues, is expected to present ongoing challenges throughout this year and into the near future.”

Still, Ching doesn’t appear to be losing any sleep about which way the US Federal Reserve will move.

“Our primary objective is to ensure that our investments fulfill the commitments made under our insurance contract liabilities.

Consequently, we focus on mitigating interest rate risk while maximising risk-adjusted credit returns, rather than speculating on interest rate movements.”

There is growing consensus that the Federal Reserve may cut introduce its first rate cut in more than three years in September as inflation cools in the US and the job market tightens.

"Softening labor market conditions have boosted the likelihood of more FOMC [Federal Open Market Committee] rate cuts even without clear recession signals," said Ryan Wang, US economist with HSBC Global Research said in an August 6 note.

"We now expect three 25 basis point cuts in 2024, though the potential for a larger 50 basis point cut in September has increased," the note said.