Cathay Life, Taiwan Life keep faith in bonds amid global rout

The two insurers argue that a US rate hike will boost bond returns, despite Donald Trump's planned tax cuts and stimulus measures appearing to favour other asset classes.
Cathay Life, Taiwan Life keep faith in bonds amid global rout

Taiwanese insurers Cathay Life and Taiwan Life say they will continue to buy foreign debt – notably US bonds – even as investors flee the asset class in droves. 

With inflation and interest rates seen as likely to rise following last week’s election of Donald Trump as US president, investors are seeking what they feel will be higher-yielding assets, such as equities. With the new administration promising economic stimulus through spending and tax cuts, investors are worried about putting money into low fixed-payment assets, such as bonds.

Bonds globally lost $1.29 trillion in value last week alone, according to Bank of America.

However, Cathay Life, the country’s biggest insurer, and Taiwan Life both argued in analyst calls this week that US bond returns would rise as a result of a Federal Reserve interest rate rise. They also said that the cost of servicing insurance policies in Taiwan would remain low, amid the low-rate environment domestically. 

When interest rates rise, bond prices generally fall, so the two insurance firms expect the returns to come from bond yields rather than capital appreciation.

They will continue to buy foreign bonds to seek higher yields than domestic investments.

US rate rise "positive"

"The interest rate increase in the US [would be] positive for the life insurance industry in Taiwan,” said Lee Chang-ken, president of Cathay Financial Holdings. Cathay Life has NT$4.89 trillion ($154 billion) under management. He was speaking on a call yesterday.

Yeh Po-heng, Taiwan Life’s chief strategy officer, made similar point in CTBC Financial Holding’s conference call on Monday. Taiwan Life is CTBC’s life insurance arm, with NT$1.12 trillion in assets under management.

Their comments make sense, a sell-side analyst told AsianInvestor, requesting anonymity. Taking Cathay Life as an example, about 10% of its assets expire every year, so when it buys new assets – mostly US bonds, as the interest rate is expected to rise in the US – bond interest will rise, boosting investment returns. Meanwhile, the value of liabilities continues to decline in Taiwan, given the local low-rate environment, she added.

What's more, the duration of liabilities for both Cathay Life and Taiwan Life remains significantly longer than the duration of their assets. Since the liabilities are currently low-cost, this too is a positive for Taiwanese life insurers. As of end-September, Cathay Life’s average asset duration was 10 years versus a 15.4-year liability duration. Taiwan Life’s asset duration was 9.5 years, as against 17 years of liability duration.

Continuing policy

The two insurers are holding firm with investment strategies they set out earlier this year. AsianInvestor had already reported plans to increase foreign bond allocations by Cathay Life, Taiwan Life, Fubon Life and Shin Kong Life.

In the nine months to September 30, Cathay Life had 52.5% of its assets in international bonds, which provided 5.9% pre-hedged investment yield over that nine-month period. Of all its asset classes, only policy loans (6.1%) and domestic equity (6%) yielded more. International equity returned 5%, real estate 3.8%, domestic bonds 2.4% and mortgage and secured loans 1.9%.

Some 43% of Cathay Life’s overseas fixed income investments were in North America, 24% in Asia Pacific, 19% in Europe and the other 14% elsewhere. 

Taiwan Life had 58.9% of its assets in international bonds. It will continue increasing allocation in foreign bonds, but will also diversify its portfolio. In particular, it will target long-term real estate investment projects, Yeh said. 

Taiwan Life’s chief investment officer Alex Liu had also said in August that it would double its exposure to alternative assets. It plans do do this by raising its private equity and property exposure. He had also said that the firm was monitoring the volatility in Europe and planned to buy UK property when it felt the market was near the bottom.

However, Cathay Life is more cautious on alternatives, citing the relatively high capital charges they impose. Hence the firm’s investments in PE, venture capital and hedge funds are very limited, said Sophia Cheng, CIO of Cathay Financial Holdings, on the conference call yesterday. 

Cheng’s view is echoed by Liang Xinjun, chief executive of Chinese investment group Fosun, which also has very little of its insurance portfolio in hedge funds or PE, also citing high risk capital charges.

Meanwhile, other investors – from institutions to family offices – are steadily moving to increase their exposure to private-market assets.

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