Cathay Life, the biggest lifer in Taiwan, is planning to further ramp up its allocations to fixed-income exchange-traded funds (ETFs) to capture gains in a changing credit environment. 

Given new rules that limit their overseas exposures and the room they still have before they reach the cap on their ETF investments, other insurers on the island are seen likely to follow suit.

“Cathay Life is now still interested in investing in fixed-income ETFs," a spokesperson at the insurer told AsianInvestor. "At present, fixed-income ETFs account for 1% of our investable assets. Depending on the market conditions, [we] will increase the allocations in the future.”

The lifer, with investable assets of NT$5.75 trillion ($185.78 billion) as of the end of the third quarter last year, is keen to invest overseas, especially in fixed income securities.

ETFs have a high investment efficiency, which would allow Cathay Life to quickly build up exposure to high-quality credits during the late stage of the cycle. ETFs denominated in New Taiwan dollars also offer protection against exchange rate risk, he said.

Credit risks across many sectors are rising with a looming cyclical deterioration in credit conditions and global debt at near-record levels, Fitch Ratings said in a report earlier this month. Ritu Arora, Asia chief investment officer for German insurer Allianz, has also warned about hidden market risks as the super-easy credit conditions after the global financial crisis dissipate.

Cathay Life's revised investment plans could be mirrored by its Taiwanese peers after new rules were introduced to limit investments into Formosa bonds – foreign-currency issues by non-domestic companies in Taiwan.

Formosa bond holdings have been included in the calculation of insurers' overseas investments since November. Including Formosa bonds, insurers can't invest more than 65% of their investable assets overseas.

Bond ETFs that track foreign indices and are denominated in local currency can enable insurers to gain indirect overseas exposure without reporting them as foreign assets, which are capped at 65% of total investable assets. Insurers will like bond ETFs more after the rules on Formosa bonds, a Taipei-based institutional sales head at an asset management company who declined to be named, told AsianInvestor.

Taiwanese insurers are thought to account for about 70% of the investment into bond ETFs issued by local fund houses. A lot of the products are designed to suit the investment needs of a single insurer. Yet insurers can still invest a lot more in bond ETFs before they hit the regulatory limit, he said.

A Financial Supervisory Commission (FSC) spokeswoman told AsianInvestor that the whole insurance industry’s investments in ETFs and other securitised products amount to 1% of their investable assets as of September, while the regulatory investment cap is 10%.

STRONG INFLOWS

The bond ETF market in Taiwan has been expanding, so much so that it is said to have caught the attention of the local regulator.

The FSC called major insurance companies recently to review the liquidity of the bond ETFs they’ve invested in and to check on the concentrations of investments, although it isn’t planning any restrictions as yet, Bloomberg reported on January 21, citing people familiar with the situation.

FSC declined to comment on the report when approached by AsianInvestor and said it used existing mechanisms to check on insurers' ETF investments and would continue to monitor the situation.

Assets invested into bond ETFs increased nearly tenfold to $12.21 billion over 2018, while assets under management for all ETF types more than doubled to $23.57 billion over the same period, according to Taipei-based consultancy Keystone Intelligence.

A further 27 new bond ETFs are in the pipeline for listing in Taipei after receiving approval from their target indices, the Bloomberg report said.

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.