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Derivatives

Korean Insurer Considers CDO Investment Debut; CLN Ramp-Up

Seoul-based LG Insurance Co., one of Korea's largest insurers by assets, is looking to increase its investment in credit-linked notes in the coming months as well as considering investing in collateralized debt obligations for the first time as it looks for higher yielding products in the current low interest-rate environment.

Sang Heon Kim, manager in the fixed-income department, said it is looking at CDOs for its KRW1.4 trillion (USD1.4 billion) fixed-income portfolio. "This is under review," said Kim. However, he noted that while the insurer would consider investing in a synthetic CDO, it would be harder to receive approval from the regulators so it is concentrating on the cash product. The rating of the tranche and size of investment is still under review. Kim said that as he started examining the overseas portion of the investment portfolio, in addition to the domestic side last year, he became interested in using credit derivatives to enhanced yield.

"We can gain higher returns than from local bonds," said Kim, commenting on the insurers interest in credit-linked notes, which it first started investing in a few months back. Kim continued that the company is considering investing in up to five more notes, each of USD20 million in size, before year-end. "We invest in Korean names we're familiar with," he added, noting that LG typically buys credit-linked notes on domestic credits in U.S. dollars and then swaps them into won via cross-currency swaps. The insurer also uses foreign exchange interest-rate swaps for its fixed-income portfolio, which is predominantly made up of domestic and international bonds. The insurer has a CLN portfolio of around USD60 million.

LG has purchased CLNS from Crédit Agricole Indosuez and Deutsche Bank, but Kim said he is also in discussions with Credit Suisse First Boston and Morgan Stanley. Pricing and a minimum counterparty rating of single A are the most important decision factors for selecting counterparties.

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