News Life and Health18 Sep 2018

Taiwan's regulator to limit insurers' investments in Formosa bonds

18 Sep 2018

Taiwan's financial regulator plans to put limits on the investments of insurance companies in Formosa bonds, following a spike in their holdings of bonds issued by foreign issuers, reports Reuters.

Taiwan in 2014 excluded Formosa bonds -- foreign-currency bonds from overseas issuers sold in Taiwan -- from insurers' overseas investment quotas.

Now, though, the Financial Supervisory Commission said it would include Formosa bond holdings in calculating insurers' overseas securities investment limits.

"Taiwan's Financial Supervisory Commission is going to introduce the limits on overseas investments to protect insurers from currency mismatch risks, especially foreign exchange losses when the Taiwan dollar appreciates," wrote Jeffrey Liew and Mia Yang of Fitch's Asia Pacific insurance ratings team.

Currently, each insurance company is assigned its own overseas securities investment limit, which is capped at 45% of funds, and is typically 40%-45% for large insurers.

Among new proposals announced last month, an insurance company's Formosa bond investment plus its overseas securities investment shall be capped at 145% of the overseas investment limit it was granted.

In other words, if a particular insurer has an approved overseas investment limit of 45% of its funds, the combined ceiling for it to invest in Formosa bonds and other overseas securities would be 65.25% of its funds. If it has already reached the 45% ceiling in its investments in foreign securities, other than Formosa, that will mean it can only invest 20.25% of its funds in Formosa bonds.

"If, at the time the new rules take effect, an insurance company's total investment amount has exceeded the new investment limit, it will not be required to sell the then-current holdings of Formosa bonds but no further increase would be allowed," said CT Chang, partner at Lee and Li Attorneys-at-Law in Taipei.

That could curb a rapidly growing market that has seen blue-chip corporate issuers like Apple, Intel and Pfizer issuing bonds to Taiwanese investors, with NT$1.21trn ($39.2bn) of international bonds sold there in 2017, according to data from the Taipei Exchange.

"Taiwan lifers have become vital global investors, and their retreat from the international market will be a headache for both bond issuers and investors," wrote Natixis in a research note.

However, the limit also depends on life insurers' liability structures and their share of foreign currency policies. Natixis noted that the limit to issue foreign currency policies will be eased to 35% of total reserves, from 25% currently, as part of the planned amendments.

"This means lifers can, in principle, invest more than 65.25% of their capital if they issue more foreign currency policies," wrote Natixis. "Among the seven largest Taiwanese lifers, we estimate that NT$1.705trn (US$56bn) is available for overseas investment based on the maximum issuance of foreign currency policies."

The new rules have also eased restrictions on what foreign assets insurance companies can buy, giving them more freedom to buy sovereign credit outside the OECD countries.

Lifers with an investment quota above 40% will be able to allocate up to 3% of their invested capital to private equity, up from 2% currently.

Foreign investments could already be levelling off, though, as Taiwanese insurers find it difficult to earn high returns while managing their currency risk.

The amendments are expected to take effect in November this year.

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