Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The insurance companies have been hit by a combined wave of asset write-downs, diminishing investment returns, foreign currency movements and accumulative hedging costs. Total write-downs by the three insurers amount to NT$6.21 billion ($189 million). Shin Kong suffered the largest drop with its investment income for the first nine months totalling NT$19.31 billion û 49% lower than the NT$37.57 billion recorded for the same period in 2007.
Shin Kong blamed its performance on a combination of NT$1.10 billion of investment losses on Lehman BrothersÆ fixed income products and a NT$740 million write-down of asset-backed securities (ABS) and collateralised debt obligations (CDOs) in the latest quarter. In the second half of the year, the insurer had already written down another NT$4.57 worth of CDOs.
Hedging costs to counter the strong gains in the NT dollar in the first half were also higher at NT$13.01 billion. Shin KongÆs total assets stood at NT$1.29 trillion ($39.23 billion) as at end-September, 6% up on the third quarter of 2007.
Cathay Life, the largest of the three insurers, reported a similar drop in investment income by 42.3% compared to the same period in 2007. Year-to-date Cathay has gained a total of NT$48.71 billion, of which $28.79 billion was booked in the third quarter alone. Cathay has reported a write-down of NT$541.81 million on its assets. Its total asset pool stood at NT2.39 trillion ($72.78 billion) as at the end of last quarter û a reduction of NT$30.32 billion compared to the same period last year.
Fubon showed the most resilience among the three. Its reduction of investment income is at just 6.1% for the year. Fubon made a NT$9.14 billion return on its investment portfolios in the first nine months of 2008. It says losses on its investment in Lehman BrothersÆ preferred shares at NT$46 million and NT$81 million in CDOs of which Lehman was counterparty had already been realised in its balance sheet.
Similar to Shin Kong, hedging costs after foreign exchange gains at Fubon have moderated to just 57 basis points in the third quarter, following the new Taiwan dollarÆs easing after the summer. This compares to hedging expense at 251bps in the second quarter and 494bps in the first quarter this year.
Reassuring investorsÆ concerns that the dropping in investment returns may lead to the reappearance of negative spreads on the island, Fubon notes the problem is under control and that it has not returned since it was resolved in 2004. Asset yield for the year so far is at 4.6%, giving ample room with a 60bp spread higher than the average guaranteed rate of 4.0% in the companyÆs policies.
On a more worrying note, the islandÆs number two still has a NT$9 billion exposure to CDOs û among these 53% are in AA securities; 30% singe A; 17% at B or below ratings. Allocation to CDO totals 10% in FubonÆs overseas fixed income portfolio, which is currently worth NT$91.9 billion. Agency CMO and MBS represents another 21%; corporate bonds 6%, overseas bond funds 0.3%; others 1%. Fubon has 62% in foreign currencies and 0% in Reits as of the latest quarter.
Overall, 68.7% of FubonÆs total allocations are held in domestic market instruments, 31.3% in overseas assets. Of the NT294.1 billion overall investment portfolio, 9% is held in deposit and cash equivalents; 34.1% domestic fixed income; 30.5% overseas fixed income; 14.1% domestic equities, 0.8% overseas equities. A further 5.1% is invested in mortage loans; 2.7% in policy loans, and finally 3.7% in real estate. Year-to-date, asset yield of the portfolio is at 4.6%.
At Cathay, in comparison, the insurer is putting more cash to work. According to CathayÆs latest allocation table, it is moving 25% more cash in deposits and money markets into other assets. Allocation to cash as of the latest quarter is at 8%. It has boosted allocations to overseas and domestic debt markets at 34% and 15.8% respectively.
CathayÆs invested capital totals NT$2.11 trillion ($64.3 billion). The reset of the portfolio is made up of 6.7% in domestic equities; 2% overseas equities; 5.7% real estate portfolios. Separately, it has 16.3% invested in guaranteed lending; 9.3% in policy loans; 2.2% in held in miscellaneous instruments.
Meanwhile, Shin Kong investment allocation for the latest quarter is 28% in domestic fixed income, 29% in overseas fixed income; 11% in policy loans; 9% cash; 7% in guaranteed lending; 7% in real estate and 4% in overseas equities. The total asset size for the investment portfolio is at NT$112.5 billion.
Within Shin KongÆs overseas fixed income portfolio, 86% are allocated in AAA instruments, 9% in AA, 1% in single-A, with a further 4% at triple-B and below. Among these, 48% are held in US agency MBS and debt; 37% in non-US agencies instruments; 3% in sovereign debt; 8% in CDO and a final 4% in corporate bond, financial bond, hedge funds or money market funds combined. These investments totals NT$330 billion.
Shin Kong says it placed a NT$410 billon hedge on its portfolio. Of these, about 65% are used on currency swap and futures; 10 to 15% on a basket of currencies with high correlation to NT dollars and a final 20 to 25% in natural hedges. Shin Kong is targeting its hedging costs at 2% overall.
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