Taiwan insurers turn to foreign bonds after rule change

Relaxation of foreign asset classification drives increase in demand for higher-yielding paper from Taiwan's insurers

Taipei, Taiwan

Taiwan insurers have fuelled a fivefold increase in the purchase of onshore-issued foreign-currency bonds, following a May regulatory change that means the securities are no longer considered overseas investments, according to figures from GreTai Securities Market (GTSM), the over-the-counter securities exchange.

Taiwan's legislature passed a bill in May that excludes locally issued foreign-currency bonds from insurers' overseas investment basket. The amount of overseas investments insurers can hold is capped, and foreign currency bonds used to count toward this total regardless of whether they were issued on or offshore.

As a result, the amount of foreign bonds issued so far this year has hit $3.4 billion – almost five times the amount in the same period in 2013. GTSM estimates that 76% of the total $3.4 billion has been issued since May.

"The government wants to provide more channels to meet the life insurers' asset allocation needs," says Bing-jing Huang, deputy general manager at GTSM in Taipei. "Excluding onshore foreign bonds from their overseas investment cap will be helpful for the yield enhancement".

Yields of 10-year and 20-year Taiwan government bonds stood at 1.58% and 2.1% respectively as of August 18, versus returns of about 4% for foreign issued zero-coupon bonds. But while foreign bonds are attractive to Taiwan's insurers for yield enhancement, domestic regulation limits their investment in overseas instruments to 45% of total assets.

"Many Taiwanese insurers, particularly the large ones, are close to hitting the foreign investment cap," says Chris Chien, Taipei-based senior supervisor in the investment management department of TransGlobe Life Insurance. "For this reason the regulatory change is no doubt good news for them," he adds.

Dollar-denominated zero-coupon callable bonds have long been a favourite of Taiwan's insurers and they have been the biggest single component of the increased uptake in foreign assets, with year-to-date issuance totalling $1.49 billion.

A zero-coupon callable bond is one which makes no periodic interest payments and is sold at a discount from par value. The buyer of the bond receives a return by the gradual appreciation of the bond, which is redeemed at face value at maturity. The issuer of the bond retains the right to terminate the bond at a preset point in time.

A source from a Taipei-based insurance firm says: "We are interested in buying dollar-denominated zero-coupon callables as we are running out of the overseas quota. Such bonds with over 4% annual yield outperform most of the existing products onshore."

So far Deutsche Bank, Societe Generale, Nomura and Crédit Agricole have issued zero-coupon callable bonds in Taiwan with an internal interest rate ranging from 4.5% to 4.95% and a duration of 20 or 30 years.

Nomura predicts the demand among Taiwanese insurers for onshore long-dated dollar callable bonds will continue to grow in the next three to six months. Apart from dollar bonds, the regulatory change is also driving growth in CNH (offshore renminbi) bonds with the year-to-date issuance reaching 5.8 billion yuan ($940 million) – a 49% increase on the same period last year. Banks with mainland Chinese background have been the major issuers.

"The government wants to develop Taiwan into an RMB offshore centre," says Huang at GTSM. "RMB deposits in Taiwan have hit record highs, which need to be invested through appropriate channels."

RMB deposits in Taiwan reached 240 billion yuan by June, according to local media reports.

CNH bonds issued so far in Taiwan have typically been shorter dated than dollar paper with tenors ranging from three to 10 years. Insurers, along with banks, securities houses and mutual funds are major buyers.

"Medium and shorter-dated RMB bonds are more favoured by our clients at the current stage," says Steven Xiao, chief dealer of fixed income at Bank of Communications in Hong Kong. "From an issuer's perspective, it is also reflective of cost control as the yield curve tends to be steeper for longer-dated bonds."

According to Huang, the Taiwanese authority hopes to push the issuance of CNH bonds this year to hit 16 billion yuan.

Earlier this year, the Financial Supervisory Commission of Taiwan raised the ceiling of CNH bonds issued onshore by mainland Chinese banks from 10 billion to 25 billion yuan.