Cathay eyes record yield on low FX hedging costs

• By Kao Shih-ching / Staff reporter

Cathay Life Insurance Co (國泰人壽) yesterday said its after-hedging recurring yield is expected to hit a record high this year, in light of higher foreign bond yields and lower foreign-exchange hedging costs.

The profit engine of Cathay Financial Holding Co (國泰金控) saw its pre-hedging recurring yield reach 3.16 percent in the first half of this year, up from 2.84 percent a year earlier, due to rising yields for new foreign bonds amid rate hikes, it told an online investors’ conference.

Cathay Life said its cash dividend income would likely grow 10 to 15 percent this year from NT$20 billion (US$658 million) last year, as its equity investments have generated more dividends this year, in contrast to its focus last year on realizing capital gains by selling stocks, Cathay Life executive vice president Lin Chao-ting (林昭廷) told the conference.

Photo: Allen Wu, Taipei Times

Like bond yields, cash dividend income is a source of recurring yield for life insurers.

The life insurer said it registered a hedging gain of 0.21 percent for the first half of this year, translating into a gain of US$0.21 for every US$1 invested in assets denominated in foreign currencies.

The hedging gain was due to the insurer’s well-performing hedging strategy that helped offset hedging costs incurred in the use of more traditional hedging tools, such as currency swaps and non-deliverable forward, Lin said.

Cathay Life continued to see hedging gains last month, but whether it can maintain the gains during the second half would depend on market conditions, he said.

“Overall, considering our good pre-hedging recurring yield and the possibility of making hedging gains, we expect our after-hedging recurring yield to hit a record high this year,” Lin said.

From January to June, the life insurer made a net profit of NT$40.5 billion, the second-highest for the period, even though it was down 48 percent year-on-year due to a high comparison base last year.

Asked if the implementation of the International Financial Reporting Standards 17 (IFRS 17) would affect its financial strength, Cathay Life said its book value would expand under the new rules, citing internal calculations.

Under the IFRS 17, a life insurer’s assets and debts would be affected by changing interest rates, and Cathay Life found that rising interest rates would actually lead to a rise in its net worth, Lin said.

However, it is uncertain whether rate cuts would affect the book value contrarily, Lin said, adding that the company needs to do more calculations.