Korean insurance companies are eyeing credit derivatives for yield pickup as falling interest rates cut into returns on their floating-rate bond portfolios. Samsung Life Insurance is considering its first use of credit derivatives, while Kyobo Life Insurance is eyeing extending its use. Fund management companies are also expected to increase their use of credit default swaps and credit-linked notes for the same reason, according to Young Hee Kim, head of derivatives marketing at Credit Lyonnais in Seoul.
Samsung, with USD50 billion in assets, is earning less on its bond portfolio as interest rates drop, and is concerned that this trend will continue, said Myung-Gyu Oh, general manager, head of risk management in Seoul. It is considering buying credit-linked notes, Oh explained. Samsung's bond portfolio is 30% floating- and 70% fixed-rate. A marketer in Seoul noted that the three-year government bond benchmark interest rate dropped Friday to a new low of 5.44% compared with around 8% at year-end.
Kyobo, with USD20 billion in assets, is considering upping its use of credit default swaps and credit linked notes to increase yield, said Bum-Jun Lee, general manager, foreign investment department in Seoul. Kyobo started using credit derivatives around two years ago, selling protection on Korean and U.S. names, he said.
Korea's financial regulator, the Financial Supervisory Service, is set to issue regulations on insurance companies using credit derivatives in a couple of weeks, said B.J. Jo, an official in its insurance supervision department in Seoul. Currently they are allowed to use them only on a case-by-case basis, he continued, declining to elaborate.