Taiwan Insurers Seek Ways to Invest $580 Billion of Assets

Taiwan’s insurers are seeking new investments, from securitized government assets to Chinese bonds, to boost returns on their $580 billion of assets, according to Taiwan’s Life Insurance Association.

Regulators have eased restrictions over the past two years to help insurance companies buy more overseas property and foreign-currency bonds. These measures aren’t enough, said association Chairman Paul Hsu, who is also chairman of Taiwan Life Insurance Co., the island’s ninth-largest insurer with NT$465 billion ($15.5 billion) of assets.

“Over the past few years, most of the industry’s problems have been about where the cash can be invested,” Hsu said in an Aug. 14 interview. “When one pool fills up, we need to look for the next one.”

Restrictions on equity and foreign investments meant insurers on the self-governed island have struggled to increase returns as premium income jumped, prompting them to put their cash into local debt and pushing the sovereign yield down to 1.58 percent, one of the world’s lowest. Overseas assets are capped at 45 percent of investment capital.

Hsu suggests allowing insurers to buy more structured notes, quickening the approval process for investing in real estate overseas and securitizing government assets such as public housing, which the executive estimated could return 3 percent annually.

New Rules

“You have few investments to offer, but you’re forcing us to put our funds in the local market, so why don’t you tell me what to buy?” Hsu said, referring to the government. “I also need to attain a minimum yield and your investments offer only 1 or 2 percent.”

Taiwanese insurers’ total capital for investment has climbed 35 percent since end-2011 to NT$15.6 trillion as of May 31 this year, according to data from the Taiwan Insurance Institute. There are 24 domestic life insurers in Taiwan.

Lawmakers passed new rules in May excluding foreign-currency debt issued in Taiwan from the overseas quota, spurring $4.9 billion of sales from corporates including Morgan Stanley and Deutsche Bank AG. The new rules have allowed some firms -- including Cathay Life Insurance Co., the island’s largest with NT$4.32 trillion of assets -- to boost overseas purchases to more than half of their assets, Hsu said.

Reinsurance Plan

Taiwan eased certain rules restricting overseas property investments in April 2013. Cathay Life Insurance Co. paid 310.8 million pounds ($516 million) for a property in London, which will yield more than 5 percent in rent, according to an e-mailed statement today.

Issuers such as Nomura Holdings Inc. and Credit Agricole SA also sold zero-coupon, callable bonds in Taiwan this year. While buying debt with equity-like qualities isn’t prohibited, official consent from the regulator would encourage insurers to invest more, Hsu said.

“Since there are few good local investments, most insurers want to go abroad,” he said. “Foreign companies are also very interested in us.”

China Reinsurance (Group) Corp., the nation’s biggest reinsurer, proposed taking funds from Taiwan’s yuan insurance policies, for a 4 percent return, to invest in China’s onshore markets, Hsu said, adding that the plan is pending regulatory approval.

Cross-strait regulators plan to renegotiate an agreement allowing Taiwan to invest its yuan funds directly in Chinese securities after a deal signed last year was stalled by anti-China protests. The program had been part of a controversial trade pact signed between China and Taiwan, which awaits approval by the Taiwan legislature.

Policy Rate

The industry’s 3.8 percent weighted average liability cost is still significantly higher than its recurring investment yield of 2.8 percent in 2013, according to a June presentation by the financial regulator. The investment yield has dropped more than the liability cost since 2000.

This may start to change as Taiwan prepares to raise its benchmark policy rate for the first time since June 2011, with 10 of 15 analysts surveyed by Bloomberg seeing a rate higher than the current 1.875 percent by March 2015.

While such forecasts are prompting insurers to cut their bond holdings, higher interest rates will increase returns in the long run, according to Hsu.

“The negative interest-rate spread is eating up our profits,” Hsu, a former lawmaker with the ruling Kuomintang party, said. “If we can raise the investment yield and expand the number of investment channels as interest rates rise, Taiwan’s insurance industry has room for growth.”