Cathay Life and Fubon Life are expected to increase their exposure to US bonds while maintaining overall investment allocations to equity that increased during the first half, as the Taiwanese insurers seek to offset the impact of interest rate drops.

Cathay Life’s NT$6.63 trillion ($225.64 billion) investment portfolio had 6% of its funds invested in domestic equity as of June 30, up from 5% as of the end of 2019. The asset class has delivered the highest return of 8.8% in its portfolio, Cathay Life’s first-half results released on Tuesday (August 25) showed.

Meanwhile, Fubon Life’s domestic stock investments make up 10.4% of its NT$4.17 trillion portfolio, up from 9.6% a year earlier, according to its six-month results announcement last Friday (August 21). Taiwan’s TAIEX index has risen about 47% to 12,758 as of Tuesday compared with its lowest level in March.

The two insurers have been looking to invest in high-dividend yield domestic equities, and if the market rebound is sizeable they may sell to realise the gains in the second half, Kelvin Kwok, analyst for Asia financial institutions group at rating agency Moody’s, told AsianInvestor. That said, the insurers' equity positions may remain the same as they would be able to merely winnow down positions that have increased in size as a result of the price increases. 

Both insurers’ holdings of cash and cash equivalents are the same, at 3.9% of their portfolios. For Cathay Life, that represents an increase from 3.7% as at the end of 2019. It told AsianInvestor in April that it had raised its cash position in the second half of 2019 after high asset values prompted the firm to de-risk its portfolio.

A senior executive at the press call declined to comment on whether the lifer will continue increasing its cash holding in the coming six months. The executive said that Cathay Life would make the adjustments depending on market conditions.

Cathay Life’s investment yield for the first-half of the year after hedging was 3.78%, the smallest in at least seven years. This is lower than Fubon Life’s investment yield of 4.2% after hedging.

The disappointing performance was due to a post-tax investment loss of NT$7 billion registered in the first six months of the year. This was on top of an after-tax loss of NT$4.2 billion, booked earlier in 2020 the year, for its 37.3% stake in Bank Mayapada in Indonesia. The loss is credit negative for Cathay Life, according to Moody’s.

MORE US BONDS

Taiwan lifers typically have a high level of overseas exposure. Cathay Life’s international bond positions rose by a marginal 0.02 percentage point to 59.1% compared with six months ago, while Fubon Life’s overseas bond exposure stood at 56.4%.

Although US interest rates dropped substantially in the second quarter, depressing bond yields, at the same time hedging costs were down. This helped to lift after-hedging investment yield. That’s one of the reasons why Cathay Life and Fubon Life will likely continue to raise their exposure to overseas bonds, Kwok said.

The short-end of the yield curve is unlikely to increase as the Federal Reserve is expected to maintain a loose monetary policy. However, market interest rates could go up if there are more bond issuances, a senior executive at Fubon Life said at the video call.

Cathay Life is cautious about the credit ratings of bond investments as a prolonged pandemic could lead to rising default rates among corporates. The insurer plans to maintain a prudent stance going into the second half, the executive at the lifer added.

Cathay Life's investment portfolio by assets, 1H 2020

Source: Cathay Life