Taiwanese insurers have been steadily increasing their overseas investments in recent years but that could hit a plateau when new rules on Formosa bonds – foreign-currency issues by non-domestic companies in Taiwan – come into force towards the end of this year, according to analysts.

The changes are likely to affect the investments of large firms such as Fubon Life and Cathay Life, which have continued to raise their offshore investments this year, as shown by their first-half results.

Fubon Life, for instance, reduced cash levels in the first six months of this year and put it to work in overseas bonds. With the US in rate-raising mode, yields of US bonds have gone up, thereby making such investments more attractive, a senior executive at Fubon Financial said in an analyst call on August 29.

“In the second half of the year there won’t be much change [in asset allocation]," she said. "The hedging cost is now at a relatively high point and we have to consider the net after-hedging cost."

Overseas bonds accounted for 57.1% of Fubon Life's NT$ 3.57 trillion ($116 bllion) of investment assets at the end of June 2018, up from 54.3% at the end of 2017. Its deposits and cash equivalents, meanwhile, dropped to 3.4% of its portfolio from 4.8% over the same period.

It also had 17.1% of its portfolio invested in Formosa bonds, up from 15% a year earlier.

Fubon Life holds 64.5% of its total portfolio in overseas assets, up from 62.2% from a year earlier and 59.8% two years ago.

It’s a similar story for Cathay Life, whose international exposure grew by 1.3 percentage points to 63.3% of its $184 billion portfolio in the six months to June.

Overall, Taiwanese lifers had 67.51% of their NT$25.89 trillion assets invested offshore at the end of June, up from around 50% in 2014, according to the Taiwan Insurance Institute.

FORMOSA BOND RULES

But their appetite for foreign investments could be dampened by new rules limiting investments in Formosa bonds. 

Such instruments will be considered overseas investments, according to the latest draft amendments to Taiwanese rules on foreign investment management for local insurers. In addition, an insurer's overseas exposure, including Formosa bonds, will not be allowed to exceed 145% of the approved offshore investment quota, according to the announcement of the Insurance Bureau of the Financial Supervisory Commission (FSC).

The new rules are likely to crimp the pace of investing in foreign assets for insurers, Serene Hsieh, director for financial services ratings at Taiwan Ratings, told AsianInvestor. It is unlikely there will be much room for companies to buy further overseas assets while sticking to the 145% limit. “The chances are slim that insurers will substantially increase their overseas investments,” she added. 

A spokesman for the FSC told AsianInvestor that the new rules would be finalised before November 23.

FSC headquarters

Formosa bonds, which made their debut in 2013, have typically not been included in the calculation of overseas investments so far, enabling insurers to invest in them freely. This was primarily because the authorities wanted to promote the development of such bonds, Hsieh said.

But as insurers’ investments in Formosa bonds soared, regulators became conscious of the need to modify the rules as such investments carry foreign exchange risks, she added.

In July, local media reported that regulators may raise the cap on lifers’ overseas exposure to 65.25% of investable assets to ease the impact on insurers after the change in rules regarding Formosa bond investing. The FSC spokesman said it was equivalent to the 145% limit in overseas investments.

However, despite their expected reduction in appetite for foreign investments, Taiwanese insurers will be allowed to sell more foreign-currency insurance policies under the proposed rules.

When insurers put the money received from such policies into offshore assets, these assets will not be considered as overseas exposure in insurers’ portfolios. This can partially offset the impact of the change in rules on Formosa bonds, Hsieh noted.

Issuance of Formosa bonds has been robust this year, with 100 Formosa bonds totalling $30.78 billion debuting in the market as of early July. That’s nearly 80% of the issuance in 2017 – 125 offerings worth a total of $40.31 billion, according to Dealogic data.