Life insurance companies in Taiwan could face new limits on their Formosa bond investments under possible new guidelines on what they can invest overseas.

United Daily News (UDN) reported last week that the Financial Supervisory Commission (FSC) is looking to raise the cap on lifers’ overseas exposure to 65.25% of investable assets from 45%. 

The sting in the tail, though, is that Formosa bonds – foreign currency-denominated bonds issued by overseas companies in Taiwan – could be included for the first time.

When asked by AsianInvestor via email to confirm the news report, a spokesman at FSC's Insurance Bureau neither confirmed nor denied the details, but said it will meet with insurers today to discuss putting a limit on Formosa bond investments and that new rules will be announced in due course. 

Including Formosa bond investments, Taiwan's lifers had 66.83% of their NT$25.25 trillion-worth ($826 billion) of total assets – not just investable assets – allocated to overseas investments as of April-end, according to the Taiwan Insurance Institute. 

Issuance of Formosa bonds has been robust this year, with 100 Formosa bonds totalling $30.78 billion issued so far. Over the whole of 2017 there were 125 deals worth $40.31 billion, Dealogic data shows.

Formosa bonds made their debut in 2013.

If Formosa bonds are included, as proposed, it effectively put a cap on lifers’ investments in such bonds where previously there was none. In the past they could invest as much as they needed, Serene Hsieh, director for financial services ratings at Taiwan Ratings, told AsianInvestor.

The reported new measures are designed to prevent an excessive overseas exposure for insurers at a time when foreign exchange risks are rising. In addition, the Taiwan government wants to redirect investment funds to help support local companies and stimulate the domestic economy, she said.

Taiwan's financial regulator unveiled a financial development scheme last month and one of its stated goals is to retain more insurance money on the island to fund local development.

LESS FLEXIBILITY

Nan Shan Life, Fubon Life, Shin Kong Life, China Life and Taiwan Life are the five life insurance companies that had invested the most in Formosa bonds as of February this year, UDN reported, citing figures from FSC. 

Formosa bonds accounted for 16.9% of all investments held by Taiwanese insurers as of April, UDN added. The FSC could not be reached to confirm this figure.

Taiwan lifers’ investments in Formosa bonds will probably be limited to about 20% (65.25% minus 45%) of investable assets under the proposed rules, Hsieh said, so there may still be some leeway. 

However, it could still mean less flexibility for lifer asset allocations further down the road.

​Hsieh added that Formosa bond yields could rise to attract the more-limited investment funds available but Yu Wan-ju, a legislator and a member of the financial committee in Taiwan, said she doubted that would happen because of the strong underlying demand for the assets.

“We are in a market where the buyers are in weak positions ... we do not have much choice,” she told AsianInvestor.

LIMITED CHANNELS

Formosa bonds were initially not included in the calculation of insurers’ overseas investments as regulators wanted to help the market grow, Hsieh said.

The development of Formosa bonds was intended to encourage insurers to invest in long-term investments and redirect capital away from the real estate sector, Yu said.

Formosa bond terms are inferior when compared with foreign-listed bonds, but Taiwan lifers have little choice, given a lack of alternative long-term investments, so they still invest a lot in them, Yu said. 

Lifers make up the majority of Formosa bond investors and tend to hold them to maturity, as there is little by way of a secondary market. Insurers are reluctant to buy them off their peers, she said.

Formosa bonds, which are mostly US dollar-denominated with maturities stretching out to 30 years, yield between 10 basis points and 30 basis points less than comparable international bonds. About 80% of them are callable bonds and over half of them are zero-coupon bonds, Yu said.

“Compared to bonds listed in international markets, these terms are not very good. But then why [do lifers] still crave ... these bonds? It’s because they have no choice,” Yu said.

This lack of investment channels has still not been effectively resolved, Yu said, but the FSC is trying, having relaxed the rules on money pooled for the development of public construction projects, promoted green bond issuance, and expanded Taiwan's fixed income market as part of its financial development plan.