Taiwan lifers add EM bonds, reap stock dividend returns

Cathay Life and Shin Kong Life have been upping their exposure to emerging market bonds. They and Fubon Life have also generated strong returns from high-dividend stocks.
Taiwan lifers add EM bonds, reap stock dividend returns

Some of Taiwan's biggest life insurance companies have been investing of late in higher-risk emerging market bonds and could load up on more high-dividend-paying shares, which have performed strongly for them this year. 

The information, gleaned from third-quarter analyst calls in November, accompanied news that total investable assets at Cathay Life, Shin Kong Life, and Fubon Life had grown by 7% in the first nine months of 2017 to NT$5.4 trillion ($177.7 billion), NT$2.36 trillion, and NT$3.3 trillion, respectively.

It also follows warnings from some fund managers that the investment case for emerging market bonds may not be as compelling as it used to be.

Overseas assets accounted for 62% of their overall portfolios, with fixed income investments accounting for more than half of that and almost 60% in the case of Shin Kong Life.

Most of the new money allocated to overseas debt went on emerging market bonds and on international bonds listed in Taiwan, said executives of Cathay Life and Shin Kong Life. The latter's allocation to these so-called Formosa bonds, in particular, shot up by NT$73.6 billion to NT$416.3 billion over the three quarters.

The new allocation in emerging markets bonds comprised US dollar-denominated sovereign bonds, Stan Lee, Shin Kong Financial Holding's senior vice president, said during his firm's analyst call on November 16, without giving an exact estimate of how much more was added.

Shin Kong Life’s last quarterly results showed the firm’s foreign government bonds, generally, increased by NT$22.7 billion to NT$289.3 billion in the first nine months of the year. The firm also indicated in March that it planned to rotate some of its overseas sovereign bond allocation out of developed markets and into emerging markets in search of higher yields. 

A spokesman on Cathay Life's analyst call on November 14, meanwhile, said the firm had recently invested in emerging market bonds, including some in Latin America and the EMEA region, but did not disclose the amount.

Cathay Life's results showed its overseas fixed income allocation in North America stayed flat in the third quarter at 44% of the total, while those in Europe and the Asia-Pacific region slipped by one percentage point. The “others” regional category over the same period saw its allocation increase by two percentage points, or NT$100 billion, to 17%.

The revelations come as some industry experts warn that emerging market debt valuations have grown less attractive following a strong performance in 2017. 

In a November 27 note, Thomas Poullaouec, head of multi-asset solutions Asia Pacific at fund house T. Rowe Price, said “yields on EM US dollar sovereign bonds appear especially low at present.” He added, though, that there are still a few select opportunities as some currencies were still cheap and several emerging market central banks are still cutting interest rates in a low inflationary environment.

Dividend harvest 

With stock markets globally rallying through the year, equities mostly led the way for Taiwan's three leading insurers, rewarding them with high dividend incomes over the period.

“Stock returns in both home and overseas markets drove up the overall returns of Cathay Life,” Sophia Cheng, chief investment officer of Cathay Financial Holdings, said on its analyst call. As a result, Cathay Life, the largest insurer in Taiwan, saw its after-hedging investment yield increase to 4.2% in the first nine months from 4% for the year of 2016. 

Domestic stocks accounted for 8.2% of Cathay Life’s total portfolio as of end September, up from 7.9% at end of 2016, while the overseas equities weighting stayed flat at 6.4%. The two allocations posted the highest returns among all asset classes in the firm’s portfolio for the first three quarters, with domestic stocks returning 10.6% and overseas equities 8.8%.

At the same time, its cash dividend income totalled NT$22.5 billion for the first nine months of the year, close to the NT$22.6 billion recorded in all of 2016. 

Fubon Life, Taiwan's second-largest life insurer, reaped NT$17.6 billion in cash dividends over the same period, smashing past the NT$14.9 billion earned in all of 2016, its results show. It is a similar story at Shin Kong Life, which was paid NT$10 billion in dividend income compared with NT$7.8 billion in the last full calendar year.

James Yuan, chief investment officer of Shin Kong Life, said on its analyst call that the firm had changed its equity strategy. Previously, it aimed to generate 80% of equity returns from capital gains and 20% from dividend income. But from last year, “we changed the strategy of domestic equity investment [so] that 80% returns will be expected from dividends and 20% from capital gains,” he said.

Overseas equity investments, in contrast, focused on getting capital gains, to “supplement the reduction of capital gains from domestic equities," Yuan said.

Next year Shin Kong Life expects the trend to continue. “[We] continue to grasp the opportunity of high-dividend stocks”, Lee said on the same call, and the dividend income “should be higher than this year”.

AsianInvestor is hosting its fifth Insurance Investment Forum in Hong Kong on March 1. For more details, contact Terry Rayner via email or on (+852) 31751963.

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