Taiwan insurers weigh investing choices as capital erodes

Life insurers in Taiwan are diverging in their reactions to coronavirus-led market volatility, with larger insurers having taken the tumult as an investing opportunity while smaller peers fret about deteriorating capital ratios, say investing experts and rating agencies.

The island’s average life insurance sector’s average capital and earnings strength is weaker than those of major peers in the region. However, several insurers have acted to improve this, like the parent companies of Cathay Life, Taiwan Life and Shin Kong Life. Cathay Life, Taiwan’s largest insurer, replenished its risk-based capital (RBC) by NT$20 billion ($637 million) through an equity issue in August 2019. Its RBC stood at 346% at the end of last year.

That has given them adequate capital to tinker with their investment portfolios amid the volatile markets of recent weeks, say investment executives.

“The likes of Cathay Life, Fubon Life and China Life Insurance have RBCs of 280% to 300% even with market drops, so they have a good opportunity to add to their debt or equity positions,” said an Taiwanese institutional coverage expert at an international fund house.

Over the last few weeks some of the larger insurers are understood to invested in the US high yield debt market via mutual funds to the tune of tens of millions of dollars. In addition, the executive said the larger insurers have rotated some of equity investments into stocks that better meet their needs.

“We can see that after the large drop in the short term, buyers with ample cash and an ability to take positions in risk assets have looked to high dividend and low volatility equities, or plain vanilla S&P 500 stocks.”

Another strategy for some Taiwanese insurers is to try to move some risk off their balance sheets.

Jaijit Kumar, Asia head of insurance solutions at Invesco, said he has seen a push by insurers in the country to launch "innovative investment-linked products, with features of low volatility and elements of capital protection". This should help transform insurers’ balance sheets, but is likely to take some time to flow through, Hong Kong-based Kumar noted. 

Meanwhile, he added, "a quick fix [given the current environment] would obviously be to inject capital".

Fubon Life declined to comment, while Cathay Life did not respond to requests for comment.

SMALLER INSURER PAIN

In contrast, recent market conditions will only have worsened the inferior RBC levels of Taiwan’s smaller insurers, leaving them with no space to invest in cheaper assets.

“The markets have gone down so much year to date – Taiwan’s equity market dropped about 25% year to date until it rallied in the last few days to 22% down, while investment grade and high yield debt is down 15%,” said the executive. “As a result, it’s very much expected that insurers’ RBC levels will drop a lot too. That brings a lot of pressure onto the lower end of insurers.”    

Serene Hsieh, director for financial services ratings at S&P Global Ratings, agreed the capital problems of smaller insurers will likely worsen before they improve. She noted that if the stock market remains in negative territory for an extended period, the insurers will report a large amount of unrealised losses, dragging down their capital levels. Moreover, they will receive less premium income and investment returns in deteriorating markets, meaning they accumulate less capital.

Taiwan’s insurers have higher equity-related investments than regional peers, which has led S&P to rate them as “fair” and “satisfactory” for their capital and earnings strength, based on its internal capital model framework. By comparison, leading life insurers in mainland China, Japan, Singapore and Thailand are “satisfactory”, “strong” or “very strong”, S&P said in a report on the week of March 16.

The island’s insurers have on average a negative spread of about 50 basis points (bp) to 100bp between their liability cost (mainly the rate it pays to policyholders) and the investment yield on the asset side, Hsieh said.

LIMITED ACTIVITY

Immediate additional investing activity in the coming weeks could prove limited, even by even Taiwan’s stronger insurers.

Hsieh said it's unlikely that Taiwan’s smaller insurers will reduce equity investments to improve their capital positions. Instead, they will be more likely to seek capital injections, either from parent companies, stockholders, or even the government.

A financial institutions coverage analyst at another ratings agency held a similar view. “We continue to expect that insurers’ high equity allocations won’t change in the next two to three years, but we continue to see insurers moving from more volatile equities towards equities that are more stable and same time offer more higher dividend yields as insurers try to focusing more on dividend income,” he told AsianInvestor.

He added that the insurers will likely keep looking to overseas bonds on the debt side, mostly because of their superior yields.

The institutional coverage expert noted the larger insurers will likely wait for the next announcement on insurer RBC and corporate value levels, due in two weeks, before making further investment decisions. Even after that they may wait longer, looking for some illumination about the duration of the coronavirus and asset performance before committing more funds.

“The sentiment of Taiwanese insurers has changed,” he said. “They were very aggressive two weeks ago when market saw big gestures from the central banks but the market has since fallen another 5% to 10% and they’ve grown more cautious. So I think they need to wait another one to two weeks to see if market stabilises and then think about whether to add more risk as the markets absorb the shock of the coronavirus and the central banks’ gestures.”

He noted that credit spreads have on average widened by at least 100 basis points (bp) since the end of 2019, and that even including a cost of 25bp for a default rate, there is a gain of 75bp to be had. “But the situation is unclear and they’re uncertain if that pickup and default rate will still be there, or get worse.”

Instead, investing experts said it made sense to wait, if the insurers were able.

“Many assets are at quite discounted rates, and cash is king in this environment,” said a head of institutional coverage at the same fund house. “Insurers can reap rewards if they have a strong RBC. We see many long-term investors are well positioned to wait for the right entry point.”

Joe Marsh contributed to this story.

Look out for AsianInvestor articles on the appetite of Taiwanese insurers for fixed income exchange-traded funds, coming soon.