Christian Choi, regional director for ALM, investment & capital management at Ageas Asia, discusses the insurer's set-up in the region, what it invests in, and why US elections could be 'bad or very bad' for the region's outlook
Can you introduce Ageas' Asian business for us and how your team fits in?
Ageas in Asia is taking the JV partners approach, where we prefer to be minority rather than majority shareholders.
We started our Asia business 20 years ago with China, and we now are present in eight countries: China, Malaysia, Thailand, Vietnam, Philippines, India, a China reinsurance company operating out of Hong Kong, Laos, and Cambodia.
The Asian regional office is in Hong Kong, but we don't actually have any business in Hong Kong. So we have 75 people across the region, 40 in the regional office and the rest spread out in Asia.
My team is responsible for ALM, investment, and capital management. Because we have a JV model, we are not the operating entity and therefore we are not responsible for the policyholder like a traditional chief investment officer (CIO) team would be, but we work for the best interest of the shareholders of Ageas to deliver the results of investment, ALM and from a capital management perspective.
We have been rolling out a lot of capital-efficient projects in Asia to ensure that the capital we deploy in the region is smartly deployed, getting the return for the shareholder.
Although local CIOs don't report directly to me, I have the overall responsibility of the investment results, because of the business structure where we are minority shareholders. Now in India we've actually taken a majority position last year, increasing our stake from 24% to 74%, and in the Philippines we have a majority position at 51%.
Does it mean that you are setting the investment risk appetite, the ALM framework, and that is then taken to the local teams to implement?
Broadly speaking, all the SAAs are subject to local risk appetites and regulation. We don't set the target for them at the regional level, but we are involved in that discussion. And working with the local teams in considering local risk appetite, and regulatory requirements, helping them to get the best mix of assets and investment strategies, ensuring that the investment risk being taken is at an acceptable level from a group perspective. I represent the group, relying on the local expertise, and trying to strike that balance between the two.
So what are the investments allocated to?
Like any typical insurance company, fixed income is the key asset class across the board. We then also invest in growth asset classes – equity including private equity, real estate, and private debt.
The asset mix really depends on the product portfolio in the country. We have life and general insurance businesses, and they each come with their own SAA implications. Even within life, we have some par or unit-linked products which come with a guarantee component and that will dictate some requirements on the asset allocation side.
And then you add the regulatory requirements, for example in India, regulation dictates about 70% of the investment risk that an insurer can take, so your discretionary investment is really only about 30% of risk.
Which asset classes are you favoring at the moment? Where do you see opportunities?
To answer this question I first have to say that most Asian countries have either implemented or are in the process of implementing a risk-based capital (RBC) regulatory regime. The implication of this is quite large on the investment side.
Pre-RBC, Asian insurers tended to take more risk on the investment side, with less ALM constraints in the process as well.
Now, everything has to be rethought, they have to think long and hard of the implication of investment risk on the capital. So, some of our operating entities are redesigning their SAA, setting up capital budget and thinking about which asset classes can give you the necessary returns within that capital budget.
For our insurance entities, things are pretty much remaining the same in terms of asset class, with a focus on fixed income. But we are really pushing the investment teams to look for good quality fixed income paper, either corporate or in the private market as well.
Fixed income is the pillar of the investment book, so there is a lot of work being done on the credit side, and the research.
Other than that, there are some asset classes that are, maybe, a bit more capital-friendly, depending on which country you're in. For example, some insurance companies have been dependent on equity to generate their result. So we're looking for alternatives that charge less capital then equity, but still produce the return needed. We're still working through that, but some ideas include convertible bonds, which carry the same capital charge as a bond, but you have the opportunity to convert it as equity in a few years.
We try to avoid asset classes that have a high capital charge and are volatile. For example, in China we used to invest in small public equity, we don't want to do that anymore because it is too volatile.
Are most of the investments made locally? Or do you invest internationally?
We invest only in the countries where we are allowed to, because a lot of Asian countries don't allow, or cap, international investments. For example, in Singapore you can invest internationally, and we have a lot of USD investments, and that's because the local fixed income market is quite small.
The entity registered in Hong Kong has not yet invested in US dollar assets but we are working on opening up the non-HK dollar and renminbi (RMB) mandate to invest in US dollar assets.
In India it is not allowed to invest internationally, and in China it is allowed to some extent and our insurer there is working on international opportunities. In Malaysia and Thailand, you have a 10% leeway, which our operating entity is taking advantage off.
Looking back at last year, what were the key challenges in asset classes, sectors, and geographies, that you faced?
We've touched on a few already. RBC is definitely one of the key challenges, with big implications on the SAA.
Then, the interest rate cycle is another great challenge. The interest rate cycle going down in China presents a lot of challenges because in China there's a lot of multi-pay universal life products with locked-in guarantees, which means that with your future investments, you're unable to meet your promise to the clients.
It is a challenge because now is only the beginning of that downward cycle, and we don't know where it is going to end.
Are you worried about the Chinese economy, as we start to see some cracks, that it could get worse?
Honestly, it is not as bad as what you read in the media. The economy isn't good and it is struggling through a down cycle, which is going to last for a little while. But are we concerned? We are not really. At the end of the day, when you compare China with the rest of Asia, it is still by far, a lot more mature.
Compare China with India - India is strategically important, you've got to have a presence there. But to expect India to replace China on the KPI - honestly, not in the next 15 years. There are still a lot of business opportunities in China, despite the economy going through a tough time.
So we are cognizant of the current downside in the economy, but we are confident it will come back and we also feel there is no alternative in the region. You still have to rely on China, which remains a strong economy.
What is your outlook for this year?
Interest rates assumptions in the market about the US were a bit too aggressive at the beginning of the year. And I still wonder if we will see more than two interest rates cut this year. And I'm still not 100% confident the inflation issue has gone.
The recession risk is still pretty high, and we have seen some technical recessions already happening in the UK, in Japan, in Germany. When recession happens, no one can get away from it. If it happens in these countries, it will happen in the rest of the world, in Asia, in emerging markets and in the US. No one can get away from it. So I hope it is only a technical recession, and it doesn't get any worse. If it does, we will start to see defaults creeping in.
And remember, you have a large volume of corporate debt coming to maturity this year and next, which was issued at interest rates close to zero and is now coming to maturity in a world of high interest rates, and some of those corporates will struggle to refinance.
So it's not going to be an easy market from a fixed income perspective, hence my point earlier, about finding quality fixed income paper.
Looking at the Chinese equity market, it has struggled and it will continue to struggle, it has to, when you consider the geopolitical risk. Japan has benefited from this capital flow and will continue to benefit from it, unless the US changes its policy on China, which it is unlikely to do.
Will the outcome of the US election have an impact on Asia?
Definitely - either bad or really bad. Both candidates have an interest in trying to keep the US as the main superpower globally. And if you are not friendly to China then you are not friendly to Asia.
Insurance Asset Risk will host its Insurance Asset Risk Asia conference in Hong Kong on June 4th 2024. The conference is free to attend for insurers. More details here.