Fubon Life eyes US credit, shuns US Treasuries

Fubon Life bought more US investment-grade credit late last year as prices tumbled, but has no exposure to US Treasuries and is awaiting a fresh pick-up in yields before stepping up its investment in offshore fixed income.

The Taiwanese insurer will continue buying North American bonds, international foreign-currency bonds listed in Taiwan (known as Formosa bonds) and high-dividend stocks this year, a spokeswoman said on an analyst call on March 24, after the company announced its fourth-quarter results. 

Fubon Life, which saw its investable assets grow by 10.8% last year to NT$3.12 trillion ($96.5 billion), can quickly deploy some 15% of these into investments, said senior vice president Raymond Lin on the call. That includes cash, bonds and deposits maturing in one year, and net inflows of policy premiums.

"Choppy" US rate environment

But “it's not our strategy right now to invest in US government bonds”, he noted, citing a “choppy” interest rate environment. This broadly chimed with comments made by local rival Shin Kong Life earlier this month that it wanted to cut its exposure to AAA-rated, so-called risk-free bonds. 

Benchmark 10-year US Treasuries have yielded between 2.315% and 2.575% so far this year, after jumping to as high as 2.599% on December 11 from 1.778% on October 30.

Lin didn’t specify how much Fubon Life had added to its US investment-grade and financial bond portfolio during this period. Fourth-quarter data, though, showed the insurer’s exposure to overseas fixed income (excluding Formosa bonds) increased by 0.8 percentage points to 40.7% or NT$1.29 trillion. 

The rise in US interest rates in November and December reflected investor expectations that the new US administration would introduce business-friendly, reflationary policies, including corporate tax cuts and infrastructure spending. What the market is looking for now, Lin said, is the implementation of those policies.

It is therefore likely that US interest rates will hover within a certain range before moving up again, he added, without specifying the range or when he expected yields to jump again.

Fubon Life still has spare quota of about 4% to invest in overseas markets. As of end-2016, it had about 48.8% of its total portfolio in overseas assets, excluding its Formosa bond investments. Once yields start to go up again, Fubon Life will add more US investment-grade credit and financial bonds, Lin said. 

Fubon Life doesn't have much invested directly in high-yield bonds or non-investment-grade bonds, given strict regulatory constraints, he noted. Only about 3%-4% of its total portfolio is invested in high-yield bonds and high-yield bond funds combined.

Dividend push

The insurer’s cash dividend income from equity investments dropped by 9.7% in 2016 to NT$14.9 billion. That decline was partly due to the low-interest-rate environment in the second and third quarters of last year, Lin said.

Fubon Life expects the cash dividend income from equity investment to rise by 30% to 40% in 2017.

Besides high-dividend stocks, Fubon Life will also continue to invest in Taiwan’s international bond market where it expects to deploy $3 billion to $3.5 billion this year. Thanks to the big volume of issuance in this asset class in the first quarter, Fubon Life had already deployed $2.5 billion in these instruments as of March 24, Lin said. 

Issuers had rushed to Taiwan in the first quarter to issue Formosa bonds ahead of expected changes in local regulations that would prevent them from offering bonds with call dates of less than five years.

As of end-2016, Formosa bonds accounted for 11.6% of the insurer’s total investable assets, or $11.2 billion.

At that time Fubon Life had 5.3% of its total assets in cash positions. Its allocation to overseas equity edged up by 0.3 percentage points to 6.1% in the last quarter.

Domestic equity stood at 8.7% (up 0.2 percentage points in Q4), domestic fixed income was at 15.7% (down 0.8 percentage points), real estate at 6.6% (down 0.2 percentage points), and mortgage loans at 3.4% (down 0.2 percentage points). Policy loans stayed flat at 1.9%.