Sara Bonesteel, chief investment officer for international insurance at the US headquartered insurers, discusses the investment set up and outlook for the year ahead
Sara Bonesteel's business card may say she is based in the US with Prudential Financial, but the global span of her daily investment duties truly befits her role as the group's chief investment officer (CIO) for international insurance.
Bonesteel has held that position for four years now, about one-quarterof her 15-year tenure at Prudential Financial, where she has variously been managing director of alternative products, CIO of retirement then CIO of retirement and group insurance.
Her current role involves overseeing $160bn of assets mainly across Japan, Brazil, Mexico, Argentina, plus some joint ventures in India, Indonesia, Ghana, and China. Together these countries alone sit in eight distinct time zones, all for Bonesteel to watch over from her desk in New Jersey.
The biggest chunk of international business comes from Japan, which produces over 90% of the total international insurance AOI, but Brazil is a fast-growing investment pot, with an investment portfolio currently at $3.5bn.
Prudential Financial's international insurance investment portfolio is not a monolithic balance sheet, meaning Bonesteel has to manage a variety of set ups and models.
The largest part of the portfolio, Japan, is denominated mainly in Yen and US Dollars, most of which is managed out of Japan. But some of the Japan liabilities ($30bn), are reinsured internally back to the US. Another piece of Prudential Financial's 'Japan business liabilities' ($20bn), have been internally reinsured to Bermuda.
"So, between Bermuda, the US and Japan, plus Brazil and a few others – yes, [there's] a lot of different places and different models," Bonesteel says as she prepares her next trip to the Land of the Rising Sun.
Japan
Looking at the Japanese portfolio, Bonesteel says the US$ block is more interesting in terms of asset management opportunities, as there are more investment opportunities in the US market.
"Our liabilities in Japan tend to be very long and that kind of further limits the opportunity set," she explains. The yen block is predominantly invested in 30 or 40-years JGBs, as well as in a fair amount of non-yen denominated private placements and mortgages that are then swapped back to Yen. "So we do hedge the currency exposure in those blocks."
But that smooth sailing set up has been slightly disturbed by recent trends. The Bank of Japan's (BoJ) monetary policy of yield curve control (YCC) since 2016, has anchored the 10-year government bond yield at around 0% and added a negative interest rate policy to combat persistent deflation.
At the end of last year In November, BoJ governor Kazuo Ueda, suggested dismantling the central bank's decade-long ultra-easy monetary policy sometime next year. The month before that, the BoJ relaxed its YCC mechanism by rephrasing the 1% upper bound on the 10-year JGB yield as a "reference" rather than a rigid cap.
Yet given Japan's historical battle to generate inflation, one could wonder if they'll have an appetite to kill it the minute it really appears. And as such it could take longer than people think to either start raising the target range or the rates.
Still recent developments worldwide have raised new questions for Japanese insurance AuM, namely whether the cost of hedging investments for foreign currency risk is still worth it, or whether it is now better to consider local currency-denominated investments.
"It's been rough lately, and it has quelled our demand for non-yen assets," Bonesteel acknowledges, "so our appetite has been down a little bit, to the extent we could take off swaps and shift some of those non-yen denominated [investments] back to the US$ block. We'll do that just tactically to reduce those costs."
For the US$ block, most of the assets are invested in long-dated corporates, as well as some private assets and mortgages, "just without the hedging problems", Bonesteel notes.
A small part of the portfolio is also invested in alternatives which encompasses private equity, hedge funds and real estate.
"Lately, we've been emphasizing private equity more than hedge funds," she says. "As rates have come up, hedge funds have just become a little less attractive."
Although there is a temptation to come out entirely of hedge funds, because it is lower returning, Bonesteel says these investments retain some positives from being uncorrelated with the other holdings.
What of private equity, which has been in regulators' eyes for most of last year, and continues to be an area of increased regulatory oversight?
"We still feel like it's diversifying from the rest of our portfolio," Bonesteel replies. "You have a buffer thanks to the reporting, which is a quarter later. And beyond that, our PE investments have performed very wellIf anything there is an impulse to do more [rather] than less – but we are talking about a very small position size across all of our investment portfolio."
On the regulatory side, Japan moving to a new capital standard in line with the IAIS standards is uppermost in her mind.
"That will bring us closer to a mark to market world than we currently have in Japan, so it's something that all Japanese insurers are mindful of preparing for," she says. "It creates this need for duration, if you're issuing long dated products, and so that would mean more long dated assets, which are available primarily in US corporates and governments."
Brazil
Brazil has been a geography of growth lately, thanks to increased insurance premium. The liabilities are similar to that of Japan, i.e. long dated, and mostly in local currency.
As a result, most of the portfolio is invested in local real-denominated sovereigns.
"It's just a market that doesn't have as many alternatives, and is not as mature a market when it comes to investments," Bonesteel says. "But you have an emerging middle class that needs insurance protection, and we have deployed successfully so far."
The Brazilian portfolio remains relatively small at $3.5bn, and therefore is overseen by Bonesteel's team out of Newark, but she adds "some day, that could change if the business achieves significant scale and there's a case for a bigger local investment team".
Companies:Prudential Financial
People:Sarah Bonesteel