Sun Life Financial Services, a life insurance company with more than USD300 billion in assets, aims to use credit derivatives for the first time by the third quarter to buy protection on its corporate bond investments. A company official said the insurer is in discussions with investment banks, including JPMorgan and Credit Suisse First Boston, about ironing out the regulatory issues involved with income tax and accounting before entering its first deal. Officials at JPMorgan and CSFB declined to comment.
The Sun Life official said it is too early to determine how much protection it would look to buy on its USD400 million corporate bond and equity investment portfolio. He added, however, that the company would look first to buy protection on investment-grade bonds and then consider high-yield investments.
"A lot of things on the regulatory side need to be smoothed out and understood before we make the move," the official added. Sun Life is looking to enter the market as a way to avoid having to earmark large amounts of reserve capital to back the bond investments in the event of default. Life insurance companies are required under law to keep a capital reserve as a source of insurance on their corporate bond investment portfolio. "We think it might be cheaper to use a credit-default swap than carrying a lot of capital," the official said. The amount of the reserve needed is based on the credit ratings of its bond holdings.
Sun Life joins a growing list of life insurance companies, such as New Era Life, which are eyeing credit derivatives (DW, 10/22).
