TransAmerica Life Bermuda (TLB), a life insurer specializing in the wealth segment in Hong Kong, is considering expanding its investment portfolio to include alternative assets, a senior executive said.

“Currently, our exposure to alternative investments is limited. However, we are actively evaluating the viability of private equity investments,” said Ing Tai Ching, Chief Financial Officer of TLB, Asian investor.

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

With the existing investment portfolio highly liquid, Hong Kong-based Ching believes there may be opportunities to further optimize both liquidity and returns through strategic alternative investments.

“Given the current high interest rate environment and our existing liability profile, we are considering an allocation to structured assets and private credit,” he said.

“These options offer an attractive risk-adjusted return that is well aligned with our balance sheet risk. In addition, they improve diversification within our credit investment portfolio.”

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

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

The company’s total assets amounted to approximately $7.3 billion at the end of December 2023. The company began 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 desire of insurers to explore more alternative investment opportunities is in line with what other insurers Asian investor in the last 12 months.

These include AIA, FTLife and Sun Life Philippines.

A recent report from Mercer and Marsh McLennan shows that by 2024, more and more insurers around the world will be looking beyond traditional fixed income investments, with a particular focus on private debt and alternative assets.

Reasons for the interest include the growing desire for diversification and risk spreading across different asset classes, for reducing volatility and for investing in specific instruments with different risk-return profiles and a focus on long-term liabilities.

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

“In addition to considering the qualitative prospects of asset classes, we conduct rigorous quantitative analysis to develop an efficient frontier that maximizes risk-adjusted returns and guides our allocation decisions,” Ching said.

TLB’s asset allocation is heavily focused on investment grade corporate bonds in the public and private markets.

“In addition, our allocation includes some exposure to emerging market high yield and fixed income securities, with a strong emphasis on individual security selection; municipal bonds and various structured assets that offer attractive yield and diversification, as well as holdings of government bonds and cash equivalents for liquidity,” he said.

“We do not place a particular emphasis on equity investments as our portfolio does not include high-equity backed equity products.”

With profit-sharing plans, the insured can participate in the profits of the insurance company, which are paid out in the form of Bonuses or dividends

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

LONG DURATION REQUIRED

With regulations evolving – and there are plenty of them that insurers have to contend with – experts say private market investments offer prospects for risk-adjusted returns over longer periods of time.

A new risk-based capital regime (introduced in July) and updated IFRS rules are most frequently cited by insurers as the most important innovations for the investment business.

“With the advent of risk-based solvency regimes in all regions of the world – including Hong Kong, Singapore, South Korea and others such as Japan and Taiwan on the horizon – ALM is moving up the agenda for insurers. As a result, the need for high-quality, long-term and predictable cash flows is becoming a structural phenomenon, leading to a significant increase in demand for longer-dated instruments,” said Schroders in a February note.

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

“At higher interest rates, companies, especially those with cash, are less inclined to lock in (issuances at) longer-term interest rates. In fact, long-term fixed income issuance fell 34.2% from June 2022 to June 2023.

“In a world of higher interest rates, this trend is likely to continue over the long term. Therefore, illiquid assets must have a larger share to generate attractive returns that match long-term liabilities,” the statement continued.

PROCEED WITH CAUTION

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

“The prevailing uncertainty surrounding interest rates, together with high inflation, economic slowdown, geopolitical tensions, conflicts, global elections and trade issues, are expected to pose persistent challenges throughout the year and in the near term.”

Nevertheless, Ching does not seem to be having sleepless nights about what the US Federal Reserve will do next.

“Our main objective is to ensure that our investments meet the commitments we have made under our insurance contracts.

As a result, we focus on mitigating interest rate risk while maximizing risk-adjusted loan returns rather than speculating on interest rate movements.”

There is a growing consensus that the Federal Reserve could make its first interest rate cut in more than three years in September as inflation in the US eases and the labor market tightens.

“Weakening labor market conditions have increased the likelihood of further rate cuts by the FOMC (Federal Open Market Committee), even without clear recession signals,” said Ryan Wang, U.S. economist at HSBC Global Research, in an Aug. 6 note.

“We now expect three cuts of 25 basis points each in 2024, although the potential for a larger cut of 50 basis points increased in September,” the statement said.