The effects of potential interest rate hikes by the US Federal Reserve next year would be mixed for life insurers, Cathay Life Insurance Co (國泰人壽) said yesterday, but added that overall, such a move would be welcome and would likely help insurers reap higher returns.
Higher interest rates would push up insurers’ investment yields, while policy sales would also benefit from a higher rate environment, Cathay Life executive vice president Lin Chao-ting (林昭廷) told an investors’ conference in Taipei.
Even though rate hikes would likely reduce the unrealized valuation of fixed incomes, Cathay Life is not concerned, as its book value stood at NT$704 billion (US$25.33 billion) at the end of September, a relatively high level, Lin said.
Photo courtesy of Cathay Financial Holding Co
The firm could adjust its hedging portfolio and use other hedging tools, such as non-deliverable forward and proxy hedging, to leverage the rising cost of currency swaps due to rate increases, he said.
“We are sticking to our prior guidance that we can keep our hedging costs to between 1 percent and 1.5 percent of the portfolio,” Lin said.
Cathay Life’s hedging costs totaled 1.26 percent of its investment portfolio in the first nine months of this year.
Yields on short-term bonds have rebounded, but they have not risen much for long-term bonds, such as the 10-year US Treasury, he said.
“A marked rise in yields on long-term bonds means more for us,” he added.
Cathay United Bank (國泰世華銀行), Cathay Financial Holding Co’s (國泰金控) banking arm, said that rate hikes would mean short-term pain, but long-term gain for the bank.
At first, the bank would need to raise its deposit rates, but after two to three months, it would be able to increase its lending rates, bank spokesman Daniel Teng (鄧崇儀) said.
Once the Fed raises its benchmark rates, many of the bank’s wealth management clients would likely adjust their portfolios, which would increase the bank’s fee income, Teng added.
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