Taiwan’s financial regulator has been calling on insurance companies to invest more at home to support the local economy but, for now, this doesn't seem to be a priority for the country's biggest lifer.

When asked about its asset allocation plan for the coming year at a third-quarter results briefing on Wednesday, Cathay Life declined to be specific but said it intended to further increase its overseas allocations, particularly in fixed income.

“The broad direction is we will continue to increase overseas investments but they’ll mainly be fixed income allocations. This is something that we can answer,” said a senior Cathay Holdings executive at the analysts' meeting webcast live from Taipei.

AsiaInvestor was unable to ascertain who exactly made the comments, but among those said to be present was Lee Chang-ken, president of Cathay Financial Holdings.

As at end-September, international bonds made up 57.8% of its investable assets of NT$5.75 trillion ($185.78 billion). The allocation weight is 2.1 percentage points higher than at the end of 2017, making it the biggest change among all asset classes. In contrast, the lifer only had 5% of its portfolio in domestic bonds, 0.5 percentage points less than at the start of the year.

The return on Taiwanese bonds is currently lower than on comparable US Treasuries and there is no clear sign of domestic interest rates rising just yet, Serene Hsieh, Taipei-based director for financial services ratings at S&P Global Ratings, told AsianInvestor. This is in contrast to the US where there have already been eight rate hikes this cycle and monetary policy is still being tightened.  

The yield on 10-year government bonds is currently 0.92% in Taiwan compared with 3.13% in the US.

The asset class that gave Cathay Life the highest return was equities. Domestic equities and international equities took up 8.1% and 7.1% of the portfolio and returned 12.1% and 10.8%, respectively, over the third quarter.

The company said it has steadily increased its allocation to A-shares and Hong Kong equities since the beginning of the year.

But it declined to comment on its equity allocations in the wake of October's sharp global market declines, except to say that its quantitative investment team use both top-down and bottom-up methods to track global economic cycles.

“We have an in-house model to monitor the probability of a recession. If it rises significantly to a certain level, we’ll for sure make some adjustment in asset allocation and investment strategies,” a second senior executive said.

DOMESTIC FOCUS

Taiwan's Financial Supervisory Commission (FSC) said in June that it wanted domestic insurers to invest NT$150 billion ($4.9 billion) over the next three years in the country's so-called five plus two innovative industries, as well as in the public construction and long-term care sectors.

Five plus two refers to five industries seen as having strategic value for the country – the internet of things, biomedical, green energy, smart machinery and defence – subsequently expanded to include new agriculture and the circular economy (which is related to the recycling of products).

The FSC subsequently announced a drastic decrease in the risk charge for insurance company investments into the five plus two industries through private equity funds. The risk coefficient for such investments was cut from 26.38％ to 3.19% in order to encourage insurers to invest more in these areas.

Separately, Cathay Life and other insurers have urged the regulator to also assign a lower risk coefficient to public equities held over longer periods, as well as equities that are bond-like in nature and have good environmental, social and governance (ESG) elements.

An FSC spokeswoman last month said these proposals were still under consideration.

Also being mulled is whether to install a mechanism that discourages insurers from selling domestic company shares when stock markets are slumping or buying them in a rampant bull market, so insurers are less inclined to offload stock holdings in a hurry when the market isn't doing well. 

Cathay Life's investment yield after hedging was 4.19% in the third quarter, a slight drop from 4.22% in the previous quarter.

Hedging costs were 1.22% for the first nine months of the year, mainly as a result of currency swaps, Cathay Life said.

Source: Cathay Life