Cathay Life lifts overseas exposure, bumps up yield

Aug 23, 2018

The Taiwanese life insurer raised its exposure to global bonds and equities, while maintaining low forex hedging costs -- a strategy that yielded higher portfolio returns from a year ago.

Cathay Life lifts overseas exposure, bumps up yield

Higher overseas allocations combined with stable currency hedging costs helped lift the return on Cathay Life Insurance's investment portfolio, its half-year results showed on Thursday.

Wholly owned by Cathay Financial Holding and the largest life insurer in Taiwan by premiums, Cathay Life raised its international exposure by 1.3 percentage points in the first six months of 2018 to 63.3% of its NT$5,698.9 billion ($184.9 billion) investment portfolio.

The lion's share of that is in bonds, which took up a 56.5% share of the portfolio, up from 55.7% at the end of 2017 in spite of the greater bond-market volatility whipped up by a succession of US interest rate rises. Asian bonds saw the biggest increase, rising 2 percentage points to 24%.

Kelvin Kwok, an analyst at Moody’s Investor Services, noted that most of Cathay Life’s overseas bond holdings were in high-quality, investment grade instruments, which tend to be less affected when market conditions turn choppy.

The relatively low supply of Taiwanese bonds as well as low local yields are also likely to have encouraged the lifer to dial up its global bond allocations, Kwok told AsianInvestor. To illustrate, 10-year government bonds yield 0.88% in Taiwan while in the US they yield 2.88%.

It was global equities, though, that delivered the best performance in the portfolio, a first-half return of 13.4% compared with 8.3% in 2017. This asset class accounted for 6.8% of the portfolio, up from 6.3% earlier.

Kwok said the lifer is increasingly focused on generating recurring investment income and is therefore likely to have leaned towards investing in “value” stocks that offer good dividends.

That would appear to be the case with local equities as well.

“The company’s equity holdings are concentrated in certain large Taiwanese corporates, although these investments in the telecommunications and semiconductor industries provide stable dividend income,” Moody’s said in an earlier report this month on Cathay Life.

All told, Cathay Life was able to lift its overall investment yield (after hedging) to 4.22% at the end of June from 3.9% a year earlier.

Also helping, given its high overseas allocations, was Cathay Life's currency risk management. The insurer’s currency hedging costs came in at 1.09% of its foreign assets of around NT$3,680 billion – undercutting its local peers whose hedging costs are typically closer to 1.5%-2%, according to Kwok.

Cathay Life’s ability to maintain lower hedging costs compared to peers has helped its investment yields in the past and that trend is expected to continue, he added.

Cash aside, Cathay Life trimmed its allocations to other asset classes, including local equities, policy loans and real estate.