Taiwanese life insurers are issuing an unprecedented amount of bonds that pose more risks to investors, as they rush to improve their finances before a deadline to shore up capital.
Already this year, the nation’s seven major insurance firms have sold US$2.4 billion of subordinated notes that put investors behind other debt holders for claims on assets in the event of any bankruptcy.
That is a record for the first half of a year, data compiled by Bloomberg showed. Insurers have also announced plans for a record NT$158 billion (US$4.88 billion) of issuance over the full year.
Photo: Wu Chi-lun, Taipei Times
Long-term subordinated bonds have become a favored channel for fund raising, as Taiwanese life insurers seek to build up their assets before a new accounting system is introduced by 2026 that would require higher financial standards.
Insurers were only given permission to issue such bonds with maturities of more than 10 years in April last year. The vast majority are denominated in New Taiwan dollars, although some are in the US currency.
“We expect Taiwanese insurers to continue to issue subordinated debt to enhance their capital adequacy and the level of issuance is likely to remain high in 2024 and 2025,” Fitch Ratings Ltd senior director Terrence Wong (王長泰) said in Hong Kong.
The subordinated bonds are popular with investors as their yields stand out from the relative low ones that have long predominated in Taiwan’s fixed-income market.
Buyers include traditional investors such as government funds and financial institutions, along with less frequent purchasers, including non-financial companies and high net-worth individuals.
A 10-year subordinated bond issued by Cathay Life Insurance Co (國泰人壽), the nation’s largest insurer, offers an annualized yield of 3.7 percent, about 2 percentage points higher than similar-maturity sovereign debt.
“The yields of the sub bonds are indeed very attractive as Taiwan dollar denominated fixed-income products seldom generate yields above 3 percent,” said Tommy Gu, a fixed-income trader at Taipei-based Capital Securities Corp (群益金鼎證券). “The lifers could also be under some level of pressure to use higher yields to ensure demand.”
Non-financial corporates that have invested in the subordinated debt include laptop maker Acer Inc (宏碁) and biotech company Ever Supreme Bio Technology Co (長聖國際生技), exchange filings showed.
While the subordinated securities have proved increasingly popular, one of the underlying risks is the relatively thin liquidity of those issued in the local currency.
Most bondholders in Taiwan tend to buy and hold, which means those seeking to sell prior to maturity might have to do so at a discount, Taiwan Ratings Corp (中華信評) senior director Andy Chang (張書評) said.
At the same time, a wipeout similar to that of Credit Suisse Group AG’s AT1 bonds is unlikely, as most local banks have relatively strong finances, he said.
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