Cathay Life plans to increase its allocation to domestic equities amid the current market correction, after having cut its exposure to stocks in the later months of last year.
A senior executive of parent Cathay Financial Holdings said the life insurer had reduced its exposure to equities while holding more cash in anticipation of a large correction in the market since the third quarter, in an audio conference to announce its 2019 results on Tuesday (March 17).
Cathay Life’s cash and cash equivalents accounted for 3.7% of its NT$6.41 trillion ($212.74 billion) investment portfolio as of end-2019, 2.6 percentage points higher than a year ago, which will help the insurer weather volatility in the current market. It now plans to select quality stocks, in particular those of domestic companies, for long-term holding, another senior executive said.
“For some companies with good prospects…including domestic and international ones, their [intrinsic value] will gradually surface after the pandemic is under control, and Taiwan stocks are what we are familiar with,” he said, without specifying how much it could seek to invest.
In contrast to its increased cash position, Cathay Life's allocation to equities, including domestic and global stocks, was 14.4% as of December 2019, much lower than the 18.3% in the previous year (see table below).
The insurer’s preference for domestic stocks seems logical. Major stock indexes in the US have fallen about 30% in the past few weeks as the rapid spread of the coronavirus triggered fears of a global recession. The Dow Jones Industrial Average was down almost 3,000 points, or 13%, on Monday (March 16) after an emergency rate cut of 100 basis points by the Federal Reserve. It was the sharpest decline since the Black Monday crash of 1987.
In contrast, the Taiwan Stock Exchange Weighted Index has dropped at a lesser rate of 20% during the period and is seen to be less volatile. That means it has outperformed many others, although it is still in bear territory.
Cathay Life’s initial intention to buy domestic shares should please the local regulator, who has been urging insurers to invest more locally to support Taiwan’s economy. Cathay Life has invested 64.7% of its portfolio overseas, the majority of which is in bonds.
Cathay Life’s higher cash position meant that its recurring yield in at least the first-half of 2020 would not be as attractive as a year ago, the first executive said.
Its recurring yield before hedging was 3.65% last year, compared with 3.5% in 2018. The investment yields after hedging in 2019 and 2018 were 3.95% and 3.82% respectively.
Amid concerns of a potential global financial crisis, Cathay Life’s management said the insurer’s investment portfolio is more robust now than it was during the last global financial crisis in 2008.
Volatility in markets is inevitable, and these are challenges that financial institutions must face. Cathay Life has become more capable of riding out the storms, a third executive said.
In 2008, Cathay Life invested in collateralised debt obligation and structured products. It has since avoided products with opaque underlying assets or unclear risks and hence its investment portfolio is comprised of safer assets now, he added.