Taiwan Insurers With $580 Billion Chase Yuan Debt: China Credit

Taiwan’s insurers drove a surge in issuance of foreign debt, as an easing of ownership curbs allowed them to seek higher returns on $580 billion of assets.

Corporates have sold 4.3 billion yuan ($699 million) of yuan-denominated Formosa notes since the rule change in May, compared with 1.5 billion yuan in the previous four months. Dollar debt offerings also picked up, climbing to $4.8 billion as Morgan Stanley raised $950 million in Taiwan’s largest-ever such sale. All of the U.S. currency securities were bought by insurers, as were 40 percent of Formosa bonds with maturities of three and five years, according to CTBC Bank Co.

Insurers’ premium income more than doubled in the past decade as increasingly wealthy Taiwanese prepared for retirement, swelling demand for bonds and pushing down yields on local-currency debt. The 10-year sovereign Taiwan dollar yield fell to an average 1.59 percent this year from 2.66 percent in 2004, compared with the 4.15 percent coupon on Bank of Communication Co.’s 2021 yuan paper sold on the island.

Formosa notes “fulfill the need of insurers to raise returns,” said Yuanchun Huang, a Taipei-based fund manager at Fuh Hwa Securities Investment Trust Co., which manages NT$130 billion ($4.3 billion). “Taiwan government bonds, or other Taiwan dollar investment-grade bonds, have low yields. Insurers also don’t have to really worry about credit risks as many yuan bond issuers are systemically important financial institutions.”

Swelling Coffers

Taiwanese insurers’ total annual premium income grew an average 8 percent in each of the last 10 years to NT$2.7 trillion in 2013 from NT$1.2 trillion in 2003, according to Financial Supervisory Commission data. Premiums collected added up to 17.6 percent of gross domestic product in 2013, the world’s highest penetration rate, a Swiss Re Ltd. report shows.

Returns on local investments have suffered with the central bank maintaining the benchmark rate at 1.875 percent for the past 12 quarters. The insurance sector’s 3.8 percent weighted average liability cost was significantly higher than its recurring investment yield of 2.8 percent in 2013, according to a June presentation by the financial regulator.

“Over the past few years, most of the industry’s problems have been about where the cash can be invested,” said Paul Hsu, chairman of the Life Insurance Association in Taipei. “When one pool fills up, we need to look for the next one.”

Trading Volume

CTBC, Taiwan’s fourth-largest listed financial firm by market capitalization, sold Taiwan’s first yuan bonds in February 2013, after a currency-clearing pact with China paved the way for domestic banks to start taking such deposits. Issuance remained slow as higher yields on similar notes in Hong Kong, called Dim Sum bonds, drew investors.

Trading volume is low, with only four of the 19 outstanding Formosa bonds changing hands in July, according to GreTai Securities data. The 5.8 billion yuan of Formosa issuance this year made up only 2 percent of the offshore yuan debt market, data compiled by Bloomberg show.

Louis Mao, a money manager at Yuanta Securities Investment Trust Co., which oversaw NT$357.8 billion of assets as of July 31, said he hasn’t bought any yuan issues in the past three months.

“Mutual funds also look at liquidity, or else when we need to exchange bonds, we may not find anyone to trade them,” Taipei-based Mao said in an Aug. 19 phone interview.

Trading volume may drop further and tenors may lengthen as the Formosa market becomes more tailored for insurers which seldom trade their notes, Mao said. All the dollar debt sold since May’s legislative change matures in 20 or 30 years.

Political Hurdles

Unlike Hong Kong, Taiwan faces political hurdles as China claims the self-governed island as its territory. Taiwan’s attempts to join the Renminbi Qualified Foreign Institutional Investor program, which would allow local funds to invest yuan directly in the mainland’s markets, was stalled along with a services trade deal amid protests in March.

A group of students led demonstrations against the pact that shut down the legislature for more than three weeks this year. Regulators now plan to renegotiate the RQFII agreement and separate it from the trade deal. Taiwan also has a cap on issuance by Chinese banks, which was raised to 25 billion yuan in July from 15 billion yuan. The May amendment excluded locally issued foreign-currency debt from a 45 percent overseas investment limit imposed on insurers.

Aging Population

Insurance is the most popular wealth-management tool for Taiwanese, followed by stocks and time deposits, according to a CTBC survey released this month. People 65 years or older will make up 14.6 percent of the population in 2018 and 20 percent in 2025, compared with the current 12 percent, according to a study by the National Development Council.

Taiwan’s yuan savings increased at a record slow pace of 0.1 percent in July to 293 billion yuan as the Chinese currency fell and banks with few investment options lowered deposit rates. Following four years of gains, the yuan dropped 1.6 percent this year to 6.1513 per dollar as of 11:18 a.m. in Shanghai, China Foreign Exchange Trade System prices show.

The island’s insurers may have $15 billion to $20 billion demand each year for foreign debt, Matthew Liaw, Taipei-based head of global structured finance at CTBC, which underwrote Agricultural Bank of China Ltd.’s 2 billion yuan sale this month, said in an Aug. 19 e-mail interview.

Sales Planned

Bank of China Ltd. is planning to sell more than 2 billion yuan of notes, which would make it the largest-ever Formosa sale, according to an Aug. 14 report by Economic Daily News citing Wu Soushan, chairman of bond exchange GreTai Securities Market. The newspaper, which didn’t give a timeframe for the sale, said that Taiwan’s KGI Securities Co. is also planning an issue, while people familiar with the matter said Uni-President China Holdings Ltd. is considering an 1.5 billion yuan offering.

As insurers made room for foreign debt, the island’s 20-year sovereign bond yield rose 26 basis points to 2.15 percent since the law change in May.

“Taiwan’s funding conditions are loose and investment channels limited,” said CTBC’s Liaw. “Individuals and financial institutions are all looking for investments with good returns and good credit.”

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