Cathay Life Insurance, Taiwan's largest insurer with over TWD1 trillion (USD28.5 billion) in assets, is considering investing in credit derivative products such as credit-linked notes and synthetic collateralized debt obligations for the first time. "The idea is to diversify our portfolio," said Alex Chang, division manager of the international investment department in Taipei. The company has a USD2-3 billion fixed-income portfolio.
The life insurer will likely invest up to USD100 million in a single A or higher-rated tranche of a synthetic CDO referenced to U.S. credits. Insurers are currently prohibited from investing in unrated products such as the equity tranche of a CDO, but Chang noted that if the regulations change, it will consider making the plunge. However, he noted that this is unlikely in the near term.
Chang continued that the insurer is attracted to the diversity offered by CDOs. "If you purchase a USD10 million CDO tranche, it is quite a diverse portfolio compared with investing the same amount in corporate bonds," Chang added, "CDOs also offer an enhanced yield."
Cathay Life has yet to approach a potential counterparty but Chang said it typically deals with the international investment houses. Pricing and the diversity of the reference pool are the most important factors in singling out a CDO.