The Relationship among Currency Hedging, Manager Incentive and

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are allocated to USD assets. In addition, the currency derivatives position evaluation rule has changed from off-balance-sheet footnote to mark to market. These factors, together affect the volatility of report earnings, so we expect that adoption of currency hedging can enhance life insurance firms’ investment performance. We form the following hypothesis:

H3: Utilizing currency hedging can enhance life insurance firms’ investment

performance.

3.3.2 The Relationship among Currency Hedging, Manager Incentive and Economy of Scale

Hedging can stabilize a company’s value and maximize the managers’ lifetime expected utility. Therefore, managers often adopt hedging strategies (Gunther and Siems, 1995; Hoyt, 1997). After the implementation of SFAS No. 34, hedging cost and mark to market results are included in the exchange on gains and losses, which affect the monthly profit and loss. Currency risk significantly affects company investment performance, and changes the compensation plans of managers and their lifetime utility. Hedging can reduce the volatility of investment, so managers of the listed companies are more likely to adopt hedging strategies than unlisted companies would. This section will examine whether the high hedging²¹ in domestic-owned companies is more favorable than the foreign-owned firms’ non-hedged strategies, and whether this study’s results support the optimal currency hedging strategies of Solnik (1995) and Campbell et al. (2010).

H4: The currency hedging strategy of domestic-owned firms’ investment performance

is more favorable than non-hedging strategies of foreign-owned firms.

21 In an investor conference of Cathay Financial Holdings on March 21th, 2008, currency hedging of Cathay Life Insurance in 2007 was reported as NT$ 17.7 billion. The traditional hedging ratio is 40%; a currency basket is 50%. In 2008, Cathay Life Insurance increased its traditional hedging ratio.

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Derivative hedging decisions have a positive correlation with the size of the company (Warner, 1977). When life insurance companies wish to implement and manage derivative transactions, educating the managers becomes the most critical issue (Hoyt, 1989). Transaction costs are relevant to the exposure of derivatives;

hedged positions must be higher than 5-10 million USD to play a cost-effective hedging role (Mian, 1996). Among the five listed life insurance companies, three of them are the subsidiaries of financial holding companies, with experienced investment professionals and mature risk management systems. The scale of asset management is larger than that of unlisted companies²². This study will examine whether the hedging strategies of listed companies are aligned with the information economics hypothesis.

H5: The listed company has a scale effect in the currency hedging activity.

3.4 Empirical Analysis

This section examines the impact of currency hedging strategy on the investment performance of Taiwan life insurance industry from 2004 to 2008. It is based on the managerial discretion hypothesis and the effect of the SFAS No. 34 mark to market requirement. We also compare the different group hedged effect. The data of life insurers are extracted from the Insurance Year Book, issued by the Taiwan Insurance Institute and the TWSE Market Observation Post System. NTD Exchange Rates (annual) are extracted from the Central Bank of the Republic of China (Taiwan) Exchange Rates of the NTD against the USD Interbank Spot Market Closing Rates.

3.4.1 Data and Variables

The study period is from 2004 to 2008, and the sample comprises 22 active life insurance companies. This study attempts to compare the foreign investment returns of Taiwan life insurance firms. The 22 sampled companies were segmented into two

22 Beside foreign subsidiaries such as Nan Shan Life Insurance Company and ING Life Insurance Company, which are not listed, the asset scale of the remainder of non-listed insurance companies is relatively small.

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categories according to the equity-owner. If 50% of equity was held overseas, it is classified as a foreign-owned firm; otherwise it is considered a domestic-owned firm.

A total of 13 domestic-owned companies and 9 foreign-owned companies exist (see Table 3.1). A second classification is based on whether or not the company’s common stock is listed on the TAIEX; companies are divided into listed and unlisted companies.

Five companies were listed, and seventeen companies were unlisted (see Table 3.2).

The variables are defined in Table 3.3.

Table 3.1 Sample Companies

Domestic-Owned Foreign-Owned

Global Life Sinon Life Allianz Taiwan Life MassMutual Mercuries

Singfor Life Taiwan Life PCA Life Metlife

Kuo Hua Life Hontai Life Prudential of Taiwan Nan Shan Life

Far Glory Life Shin Kong Aegon New York Life

Bank of Taiwan Life Cathay Life ING Life Chunghwa Post China Life

Fubon Life

Table 3.2 Sample Companies

Non-Listed Companies Listed Companies

Global Life Sinon Life Nan Shan Life Fubon Life

Singfor Life Hontai Life NewYork Life Shin Kong Kuo Hua Life PCA Life Allianz Taiwan Life Cathay Life Far Glory Life Aegon Prudential of Taiwan China Life Bank of Taiwan Life ^{ING Life} MassMutual Mercuries Taiwan Life Chunghwa Post Metlife

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3.4.2 Variable Descriptive Statistics and Correlation Analysis

The descriptive statistics of the study sample associated with variables are listed in Tables 3.4 and 3.5; the average rate of foreign investment is 24.9%, with a median of 10.60%. The highest rate of foreign investment is 36.6% and the lowest is 3%. The foreign investment return was 2.02%, and the median was 2.37%; the highest performing was 10.50%, and the worst was -31.53%, caused by the U.S. subprime mortgage crisis in 2008. In summary, free capital flows increased the correlation between assets. The U.S. subprime mortgage crisis created serious investment losses Variables Variables Variable Definition

Foreign Investment Variable

Ratio

The foreign investment amount/funds.

Efficiency Variable

RF

Total return rate of foreign investment tools.

Scale Variable

Asset

Prem

Total assets of the company balance sheet at the end of each year.

Total annual premium income including the first year

Capital Structure Variable

LevR

Liability ratio The ratio of total liability to total assets, representing the degree of leverage.

Risk Variable

ExV

FinR

Exchange rate volatility, average variance of NTD against USD exchange rate.

The rate of exchange gains and losses in funds.

Gains and losses on exchange rate include hedging cost and the mark to market evaluation of monthly outstanding currency derivatives.

Dummy of Company

DuO

DuP

1: domestic-owned firms;

0: foreign-owned firms.

1: listed companies;

0: unlisted companies.

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for Taiwan life insurance firms. The average was less than the median, showing a positive skew. The peak coefficient of 21.60 is larger than 3, showing a kurtosis distribution. The basic statistical variables for the pursuit of higher returns in the international investment strategy; companies must bear the currency, asset, and credit risk. Increasing the proportion of foreign investment does not solve the negative interest-rate spread problem.

Table 3.4 Variables Statistics NT$: Thousand

Mean Std Dev Minimum Maximum Skew Kurto

Ratio

0.249 0.078 0.030 0.366 -0.835 0.135

RF

^{0.020 0.050 -0.315 0.105 -3.382 19.533}

Asset

3.38616E+8 4.99169E+8 1.43504E+7 2.35894E+9 2.500 6.034

LevR

^{0.972 0.060 0.880 1.300 3.089 13.314}

Prem

5.91340E+7 7.26778 E+7 664752 3.46186E+8 2.024 3.878

ExV

^{0.566 0.436 0.100 1.280 0.540 -1.115}

FinR

-0.001 0.004 -0.012 0.011 -0.117 0.891

DuO

0.591 0.494 0.000 1.000 -0.375 -1.894

DuP

0.227 0.421 0.000 1.000 1.320 -0.264

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Table 3.5 Correlation Matrix

Ratio RF Asset LevR Prem ExV FinR DuO DuP Ratio

1.000

RF

^{0.205 1.000}

Asset

^{0.445 0.014 1.000}

LevR

^{-0.098 -0.332 -0.190 1.000}

Prem

^{0.434 0.009 0.961 -0.199 1.000}

ExV

^{-0.020 -0.474 0.020 0.311 0.041 1.000}

FinR

^{-0.008 0.105 0.177 -0.301 0.172 -0.163 1.000}

DuO

0.321 0.160 0.101 0.329 0.131 10.00 -0.156 1.000

Dup

0.545 0.169 0.481 -0.182 0.466 0.009 0.101 0.451 1.000

3.5 Empirical Model

This study attempts to compare the currency hedging strategy and its impacts on the investment performance of Taiwan life insurance industry.

3.5.1 The Relationship between Foreign Investment and Investment

在文檔中 海外投資及避險策略與保險公司價值之探討 - 政大學術集成 (頁 59-64)