By Kim Kyoungwha
July 16 (Bloomberg) -- South Korean life insurers are shunning U.S. and European corporate bonds because of a rising risk of default and plowing money into domestic debt.
Samsung Life Insurance Co., Korea's biggest insurer, is diverting $500 million into 10-year government bonds, said Koo Sung Hoon, head of investments at the company. Kyobo Life Insurance Co., the third-largest, is reconsidering plans to invest the equivalent of $1 billion overseas and may put the money to work at home instead, said Cho Ok Rae, chief of international investments.
``Risks are increasing so we are now rebalancing our fixed- income portfolios, which means we are selling corporate bonds we hold in the U.S. and Europe,'' Koo said this month in an interview in Seoul. ``Corporate default risk will rise.''
The cost of protecting U.S. and European corporate bonds increased in the past two months on concern credit losses at banks will widen, slowing global economic growth. Financial firms worldwide have accumulated about $416 billion in writedowns and losses as the U.S. housing slump deepens. Samsung Life sold all of its U.S. regional bank debt last year, said Koo.
South Korean debt returned 1.9 percent this year, according to an index compiled by HSBC Holdings Plc. U.S. corporate bonds delivered a loss of 1.4 percent, Merrill Lynch & Co.'s Corporate and High Yield Master index shows.
``There's a long, long way to go for the U.S.,'' said Koo. ``Credit ratings are being downgraded and it's very risky for debt holders.''
Credit Risk
Samsung Life holds $14 billion of foreign assets, mainly corporate debt with credit ratings of A+ on average, according to Koo. That's the fifth-highest investment grade at Standard & Poor's. More than 60 percent of new investment was in domestic 10-year government bonds, he said.
Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies increased 2 basis points to 142.5 yesterday, according to broker Phoenix Partners Group in New York. Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 1.5 basis points to 103.75, according to JPMorgan Chase & Co. prices.
Credit-default swaps are financial instruments used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements. A rise indicates deterioration in the perception of credit quality. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Diverting Funds
Korean bonds are ``more stable and safer'' than overseas debt even after inflation drove yields to near the highest since 2002, Kyobo's Cho said in an interview yesterday in Seoul.
``We are diverting some of more than 1 trillion won ($1 billion) allocated for overseas investments into the local market,'' Cho said. ``The entire amount may go to local bonds should the second half outlook for overseas markets stay grim.''
The yield on the South Korea's 5.5 percent 10-year note due in September 2017 climbed as high as 6.19 percent this month, before falling to 6.03 percent today. Inflation accelerated to an annual rate of 5.5 percent in June, the fastest in a decade.
``The loss from selling U.S. and European bonds can be compensated for by reinvestment in Korea,'' Samsung Life's Koo said. The firm hedged overseas investments with swap contracts in which it pays U.S. dollar London interbank borrowing rates and receives South Korean Treasury yields. It will keep those contracts open after cutting overseas investments, said Koo.
`Tap Opportunities'
Korea Life Insurance Co., the nation's second-largest insurer, intends to ``gradually'' increase funds invested abroad, Kim Yong Hoan, head of global investments, said in an interview in Seoul on July 11.
``We are continuing to tap opportunities in overseas markets through hedge funds'' to achieve an annual return of 7 percent, said Kim, whose company has 50 trillion won in assets and 2 trillion won overseas. It will raise money going into hedge funds by $500 million, he said.
Samsung intends to buy $40 million in global distressed assets, including asset-backed securities, over the next five years, said Koo. It favors local debt for most of its new investments.
``We are bearish'' on U.S. and European bonds, he said. ``Even though the liquidity issue is almost over in the financial sector, the impact on consumption and employment will leave the U.S. economy with much slower growth.''
To contact the reporter on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net
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