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Session 4 – State of the Investment Market in
Asia
Arjan van Veen Paul Carrett 4/3/2014
State of Investment Markets in Asia
Asset Selection Opportunities in Asia
INTRODUCTION
 Does ALM matter?
 What do (equity) investment markets care
about?
 What are companies doing?
 What are benefits of doing this (from share
rating perspective)?
 Regulations more RBC based (and becoming
more so)
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15.0%
VNB
EV
10.0%
5.0%
0.0%
-5.0%
HK & SEA
Australia
25.0%
Shin Kong FHC
Fubon FHC
China Life TW
Cathay FHC
Great Eastern
Bangkok Life
Prudential Asia
AIA
PICC Group
China Taiping
New China Life
China Pacific
Ping An
China Life
Samsung F&M
Meritz F&M
LIG Insurance
Hyundai M&F
Dongbu
Tong Yang Life
Hanwha Life
Samsung Life
Taiwan
T&D Holdings
Sony Financial
Dai-ichi Life
20.0%
Korea
China
Japan
Suncorp
AMP
15.0
10.0
Leverage ratio (x)
4/3/2014
INTEREST RATE SENSITIVITY
Asia insurance sensitivity to 25bps rise in investment yield
Source: Company data, Credit Suisse estimates
BALANCE SHEET LEVERAGE
Asia insurance - balances sheet leverage ratio - liabilities / net tangible assets
25.0
20.0
5.0
-
Shin Kong FHC
Fubon FHC
China Life TW
Cathay FHC
Samsung F&M
Hyundai M&F
Dongbu
Korea Life
Samsung Life
T&D Holdings
Sony Financial
Dai-Ichi Life
PICC P&C
PICC Group
Ping An
New China Life
China Taiping
China Pacific
China Life
Bangkok Life
Great Eastern
AIA
Suncorp
QBE
IAG
CGF
AMP
Source: Company data, Creidt Suisse estimates
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4/3/2014
WHAT ARE INSURERS DOING?





No longer giving long-dated guarantees
Greater focus on protection / insurance
Trying to buy longer dated assets
Shortening new sales durations
Any other techniques…
 …sadly, many still not doing too much.
 Rising rates may present opportunity to do
WHAT DO MARKETS CARE ABOUT?
 Markets do not like uncertainty
 Negative surprises punished harshly
 Investors understanding of insurance in Asia
is limited – risks not fully understood.
 Hence, restoring investor confidence is a
very slow process
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4/3/2014
MARKET REWARDS LESS RISKY INSURERS
Asia Insurance - price to embedded value
2.00x
1.75x
1.50x
1.25x
1.00x
0.75x
0.50x
0.25x
0.00x
Shin Kong FHC
Dai-Ichi Life
Tower NZ
T&D Holdings
Hyundai M&F
Sony Financial
China Life TW
Samsung Life
Korea Life
Dongbu
Samsung F&M
Ping An (A)
New China Life…
Cathay FHC
New China Life (A)
Max India
China Pacific (A)
Prudential plc
China Taiping
Great Eastern
China Life (A)
Ping An (H)
China Pacific (H)
China Life (H)
AMP
AIA
Bangkok Life
Source: Reuters, Credit Suisse forecasts
ALM IN ASIAN MARKETS
 QE and Asia
 Forward looking returns
 Emerging opportunities and challenges
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4/3/2014
MACRO – ALL ABOUT QE?
S&P US 150 Credit Spread Index
S&P 500 (Equity)
2,000
100
1,500
90
80
1,000
70
500
60
0
50
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
10y US Treasury Rates
5.0
4.0
3.0
2.0
1.0
0.0
Apr‐09 Oct‐09 Apr‐10 Oct‐10 Apr‐11 Oct‐11 Apr‐12 Oct‐12 Apr‐13 Oct‐13
Source: Standard & Poors, St Louis Fed
THOSE ILL WINDS BLOWING….
Singapore vs USD 10y yields (%)
5.0
4.0
3.0
2.0
1.0
0.0
Singapore Govt 10y
UST 10y
Source: MAS Website, St Louis Fed
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4/3/2014
CASE IN POINT: SINGAPORE
 In a low rate world, what is a reasonable
forward looking expected return?
Singapore Govt Yield Curve(%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1
2
5
10
15
20
30
Tenor (years)
Source: MAS Website, 2 April 2014
EMERGING OPPORTUNITIES & CHALLENGES







Bank balance sheet reductions
Liquidity in bond markets
Risk premia diversity
Second order effects
Product management
Intensity of regulatory focus
The end of QE?
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4/3/2014
(SOME) BANKS HAVE BEEN REDUCING THEIR
BALANCE SHEETS
 Opportunities for insurers to fill the void
 Impact on bond market liquidity
 Increasing use of derivative instruments?
RISK DIVERSITY
 Most portfolios are reasonably constrained
 As per Malcolm Jones work on balanced
fund diversification:
“We see that from a high of around two and a half the effective
number of asset classes declined to around one and a half at the
height of the crisis, which is significantly lower than the maximum
possible seven.”
- Seeking diversification through efficient portfolio construction using
cash-based and derivative instruments. Malcolm Jones, Institute of
Actuaries (2013)
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4/3/2014
THE END OF QE? BUCKLE UP
 Fire drills for portfolios
 For example:




Rates spike
Credit and equity market responses
Material increase in lapsation
How much? How quickly?
CONCLUSION
 ALM will matter more and more (regulatory
and market focus)
 Markets continuing to evolve to allow this
China - Total new corporate bond issuance, Rmb bn
4,000
300%
3,500
250%
3,000
200%
2,500
150%
2,000
100%
1,500
50%
1,000
0%
500
-50%
0
-100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Corp. bond
Enterprise bond
Comm. Paper
Mid-term Note
Growth (%)
Source: Wind
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