Cathay Life Insurance could seek to extend its overseas corporate bond portfolio into the lower end of the investment grade spectrum and even into junk territory, should regulations allow.
At present the minimum rating for corporate bonds that Taiwanese insurers are permitted to invest in by the Financial Supervisory Commission (FSC) is BBB+.
However, last month the FSC announced plans to ease the rules to allow insurers such as Cathay to invest in the debt of offshore companies with a BB+ rating – three grades below the current level and one notch below investment grade. No timeframe was given.
Daniel Teng, who oversees $120 billion in AUM as executive vice-president at Cathay Life, tells AsianInvestor* that once these regulations are changed, it would look to invest accordingly.
While in the short term he says Cathay Life prefers equities, with the prospect that bond markets will grow at a slower pace this year, he notes that it has to invest in fixed income to meet its long-term liabilities.
“In such a low-yield environment, we hope regulations will be relaxed, [which will] allow us to invest in lower-grade bonds,” he says. “The problem is, do we have the ability to evaluate bonds with lower investment grades?”
As a result, he notes that Cathay Life would likely seek to partner external managers to run its offshore low-grade bond exposures, noting that they not only have a better understanding of the market, but are able to perform on-the-ground due diligence.
While this raises the prospect that Cathay Life could seek to issue mandates to external houses, the vast majority of its NT$290 billion ($9.8 billion) invested abroad is managed by Conning Asset Management in bonds. It has a smaller portion in emerging market debt, equities and alternatives.
On the markets it is interested in investing in this year, Teng points to mainland China, Asean, South America, Turkey and Eastern Europe.
Further, Japan, the US and Europe are also on its radar, Teng adds.
“We are interested in Japan because we feel the new prime minister [Shinzo Abe] knows the economy and the market,” he says, noting that Cathay Life started to invest in the Japanese market last year via domestic investment expertise.
Its investment into the US and Europe is more dependent on economic recovery. “Our investment will follow the economic rebound,” Teng says. “We will consider moving back into these markets when [the economies] show recovery.”
* An interview with Daniel Teng will appear in full in the forthcoming June edition of AsianInvestor magazine.