Cathay Life plans to further lift its overseas investment exposure in spite of official efforts to limit the amount of insurer capital invested outside of Taiwan.

It also runs counter to local regulator efforts to coax more insurer capital into domestic assets to support the Taiwanese economy.

“We will still continue to increase overseas investments to enhance returns,” a spokesperson for Cathay Life said in an email to AsianInvestor.

That’s because bond issuance in Taiwan is insufficient and the returns are too low compared with the returns available if invested in overseas fixed income, even after currency hedging costs are taken into account, the person said.

Notwithstanding Cathay Life's better return from domestic bonds in the first quarter, international fixed income investments still tend do better in the long-term, the spokesperson added.

As of March-end, the insurer's overseas investments accounted for 65.5% of its NT$5.98 trillion ($192.68 billion) investment portfolio, which is 0.2 percentage points higher than at the end of 2018.

Accounting for the rise was a slight increase in Formosa bond investments, favourable translation effects as a result of a weaker Taiwanese dollar, and tightening credit spreads due to a more stable international environment, Cathay Life said.

Formosa bonds are foreign-currency bonds issued in Taiwan by non-domestic companies. A cap on investments into them came into force late last year and has since dampened Taiwanese insurers' appetite for foreign investments by limiting Formosa bond holdings to 145% of their approved overseas investment quota. 

LOWER GENERALLY

Cathay Life's investment plan of action sets it apart from its peers.

Overseas investments accounted for 68.23% of the combined NT$25.04 trillion investment portfolio of Taiwanese life insurers at the end of April. Slightly down on four months earlier, this bucked the rising trend of recent years (see table below). 

Source: Taiwan Insurance Institute

“It’s normal that the allocation [in overseas investments] dropped a bit, because it can’t keep going higher,” Serene Hsieh, director for financial services ratings at S&P Global Ratings, told AsianInvestor, noting last year's cap on Formosa bonds. 

But it will likely hang around these levels going forward, because overseas investments are still more attractive than domestic investments, she added. 

DEFIANCE

If so, that will likely come as something of a disappointment to Taiwan's Financial Supervisory Commission (FSC).

The watchdog has repeatedly called on insurers to invest more domestically to help drive the economy.

Local lawmaker Julian Guo has also argued that Taiwan's insurers’ almost 70% overseas exposure is not just unusually high but a "world-record high". 

government scheme unveiled by the FSC in June last year aims to direct insurers to invest NT$150 billion in the next three years into the so-called “five plus two” innovative industries, as well as in public construction and long-term care sectors.

The “five plus two” refers to five pillar industries – the internet of things, biomedical, green energy, smart machinery and defence, subsequently expanded to include new agriculture and the circular economy (related to the recycling of products).

However, Lee Chang-Ken, president of Cathay Financial Holdings, explained at great length the merits of insurers investing overseas in March this year, fuelling tensions between the industry and the regulator.

The insurance industry invests the money in overseas markets through its investment capabilities and risk-control management and then repatriates the investment income, giving the economy a regular boost, Lee said.

Cathay Life declined to comment on what the FSC should do to get insurance funds to invest more domestically over the long term.