Cathay Life wants to beef up its capital base to better cope with choppy investment markets, which is a happy coincidence given the desire of Taiwanese regulators to improve local capital adequacy and accounting standards. 

Company managers declined to respond directly when asked in an analysts’ meeting on Thursday if parent Cathay Financial Holdings's plan to replenish its capital by NT$20 billion ($637 million) by issuing stock was in response to looming new rules.

Cathay United Bank, another part of the Cathay family, was last month classed by the local regulator as one of five domestic systemically important banks. So it has to meet a capital adequacy ratio of 14.5% within four years, rather than the 10.5% required of other banks.

A spokesman declined to comment on how much of the capital raise announced last week by Cathay Holdings would be given over to Cathay Life or when it would be completed.

Cathay Life managers, nonetheless, appeared keen in the analysts' meeting to stress the investment flexibility that a higher risk-based capital (RBC) ratio would give them.

“We hope to further strengthen our RBC, so there can be long-term investment opportunities [for Cathay Life] even when volatility is high,” one senior executive said.

“The market has performed well for the first half of the year and everyone is very happy. But I think that as a responsible financial institution, we have to be forward looking, which means that if the market volatility is high, we can be well prepared,” a second executive said.


Cathay Life had an RBC ratio of 333% as of June 2019, its first-half result shows.

That's relatively high compared to its peers. But the capital levels of Taiwanese insurers are very sensitive to fluctuations in the capital market. So raising capital can increase its buffer against market risks. It also gives the insurer more flexibility to invest into stocks with good valuations, Kelvin Kwok, analyst for Asia financial institutions group at Moody's, told AsianInvestor.

The insurer’s plan to increase its capital comes as the local regulator plans to introduce an additional capital adequacy requirement for domestic insurers next year. The Financial Supervisory Commission (FSC) has proposed a new metric to evaluate an insurer’s capital adequacy to strengthen their ability to bear risks. The new metric – the ratio of net assets over total assets – will be used together with the existing RBC ratio.

However, Cathay Life’s move is more about getting prepared for other new regulations down the line, Kwok said, as its ratio of net assets over total assets exceeds the proposed 3% threshold.

Taiwan regulators are expected to update their RBC regime to one that will be more like the global insurance capital standard (ICS) in 2025. The International Financial Reporting Standard (IFRS) 17 will be implemented in the same year too.

As a result, Moody’s expects more insurers in the years to come to increase their capital or retain more of it by reducing dividend payouts, among other things.

“We’ll likely see them  increase their capital. But whether this will happen in the coming 12 months will depend on how each firm manages their capital,” he said.


In other news, Cathay Life’s overseas bond investments rose again, it's first-half results showed, and they could continue to do so despite repeated calls on insurers to shift their investments home.

The company has been forthcoming in showing its resistance for greater home bias.

Overseas bonds’ allocation climbed to 59.7% of the portfolio as of June, versus 58.6% as of end 2018, even though overseas bonds only delivered a 5% return while domestic bonds delivered a 7.3% return. (see table below)

“We will continue to raise overseas fixed income investments to keep raising the recurring yield before hedging,” the first senior executive quoted earlier said.

The potential increase in Cathay Life’s overseas bond investments will likely include bond exchange-traded funds (ETFs) too. The underlying assets of such bond ETFs are mostly overseas bonds even though the ETFs are denominated in Taiwan dollars, Kwok said.

Many insurers have ramped up their investments in such bond ETFs this year, as they are not regarded as overseas investments with an upper limit. This helps to explain the higher yield on domestic bonds in the first half of the year.

However, Cathay will likely continue its investments in regular overseas bonds, as bond ETFs are not hedged for foreign exchange risks and they incur management fees, he said.

Source: Cathay Holdings (click for full view)