Cathay Life, the largest lifer in Taiwan, has been raising its exposure to bond exchange-traded funds  (ETFs) ahead of higher risk charges on such instruments.

It is investing about 5% of its investable assets in bond ETFs, a spokesman told AsianInvestor. The allocation is a fivefold increase on the start of the year when the insurer said fixed-income ETFs accounted for 1% of its investable assets.

The spokesman said the underlying assets were high-quality bonds familiar to the insurer. So as well as being transparent assets able to give out stable returns, with good levels of liquidity, the bond ETFs don't carry too much additional investment risk for Cathay Life, he said.

And because for accounting purposes ETFs belong to equity products, the associated currency risks don't have to be hedged, enabling it to save on some costs too, he added.
 
In this way, bond ETFs that track foreign indices enable Taiwanese insurers to gain indirect overseas exposure without having to report them as foreign assets. 
 
That stands in contrast to Formosa bonds, which were lumped together with insurers' overseas investments under new rules introduced in November. Including Formosa bonds, insurers can't invest more than 65.25% of their investable assets overseas without incurring restrictions.
 
Chang Chuang-chang
Tha latest available industry data from the Taiwan Insurance Institute, nonetheless, shows foreign investments still accounted for 67.93% of total Taiwanese insurance assets in August, albeit down from 68.65% in 2018.  

Taiwan's Financial Supervisory Commission (FSC) is now planning to revise the risk factors applied to bond ETFs to curb excessive exposure to these assets too.

The scale of bond ETFs has grown rapidly to reach NT$1.1 trillion ($35.9 billion) as of September. Most bond ETFs invest in US bonds but the foreign exchange risks are not fully reflected under the current risk-base capital (RBC) regime, Chang Chuang-chang, vice chairman of the FSC, told AsianInvestor in an interview.

FSC has finished its discussions on revising the risk factor for bond ETFs under the RBC framework and will introduce the new plan before the end of this year, he said. The regulator is also planning other moves to overhaul its solvency regime

According to one local media report, insurance funds accounted for as much as 95% of bond ETFs investments in Taiwan at the end of August. In the same month, the FSC released a statement encouraging asset managers to diversify the investor mix in the bond ETFs they issued.

OVERSEAS INVESTMENTS

Taiwan's insurers are known for their high overseas exposure and the regulator has been trying to lure insurers to invest more at home.

"Indeed, if you look at insurance industries in other countries in the world, which one has an overseas investment [level] of 67% like us?" Chang said. 

However, Cathay Life said that it "does not have any plan to adjust its overseas investment plan in the foreseeable future" as the domestic capital market is still limited and the scale of the new domestic industry projects cannot absorb huge amounts of capital.

It recommends the government issue more long-term bonds, promote securitisation products in public constructions, and encourage foreign institutions to issue green bonds denominated in Taiwanese dollars, among other things. 

Cathay Life had 65.8% of its NT$6.14 trillion investment portfolio invested in overseas equities and bonds as of June-end, 0.3 percentage points higher than at the end of 2018.

Highly popular in Taiwan are insurance savings policies – short-term policies that promise high returns. But with interest rates in Taiwan low and investment products less well diversified than in other countries, domestic insurers have been forced to look overseas for investment opportunities that might help them achieve higher returns, Chang explained.

To encourage insurers to invest more domestically, the FSC proposed a scheme in 2018 to encourage insurance funds to invest up to NT$150 billion into the country's strategically important 'five plus two' industries over three years. They can also invest in domestic private equity funds that invest in renewable energy and other sustainable industries in Taiwan, Chang said.

Taiwan's '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.

*This story has been updated to show Cathay Life's increase in overseas investments.