Taiwan Life Insurance, with USD2 billion in assets, is preparing to use derivatives for the first time. It plans to swap fixed-rate U.S. dollar-denominated debt to fixed-rate Taiwan dollars, in its first currency swap, said Johnson Lai, head of finance in Taipei. Dropping yields on domestic debt are forcing the insurer to increase its overseas bond allocation, which will leave it with larger foreign currency exposure, Lai said.
Yields on domestic government bonds have fallen by some 25 basis points over the last month, while those on corporate bonds have fallen by up to 10bps, largely because Taiwan's central bank cut interest rates in line with the U.S. Federal Reserve, Lai said.
By the end of the year it hopes to triple its USD20 million U.S. dollar-denominated corporate bond portfolio. Its total overseas debt portfolio is over USD100 million. Currently its domestic debt portfolio totals USD1.52 billion, equally split between government and corporate bonds. The average yield on its domestic portfolio is 6%, compared with 6.25% on its U.S. dollar portfolio, Lai said. He declined to reveal the average maturity of its bond portfolios, noting that this regularly changes.
Taiwan Life is currently talking to foreign and local banks, Lai said, declining to identify them. The insurer will choose a counterparty based largely on its credit rating, he added, noting that it will accept a minimum single-A rating. After this it will consider the level of service provided by the bank's Taipei branch and pricing.
Alex Chang, division manager, international investment at Cathay Life Insurance in Taipei, said that while it was also looking to increase its overseas fixed-income portfolio, it would not necessarily use more currency swaps because in the illiquid currency swap market the swap spread paid can sometimes outweigh any advantages of investing in the higher yield U.S. market. It would like to use foreign exchange options to hedge, but is barred from doing so by the central bank. The insurer has assets of over USD20 billion.
A marketer at a U.S. bank in Taipei said that he expected insurance companies to increase their use of currency swaps only slightly for the same reason.
