Taiwan insurers' cash pile lures US banks

Wall Street banks including Goldman Sachs and Citigroup are rushing to issue US dollar bonds in Taiwan after a rule change unlocked US$586 billion of funds held by the island's insurance companies.

Goldman sold US$974 million of 30-year notes last month in the largest such issuance on the island, leading US$7.3 billion in greenback debt offerings this year, versus zero a year earlier. JP Morgan Securities estimates US issuers can obtain lower costs than they would at home, after lawmakers in May excluded locally issued foreign-currency bonds from a 45 per cent cap on the amount insurance firms can invest in overseas assets.

Taiwanese insurers' yearly premium income has more than doubled in the past decade as the mainland's export-manufacturing boom boosted the island's wealth. Their hunt for fixed-income investments has cut the 10-year sovereign yield 116 basis points in the past 10 years to 1.71 per cent, the 13th-lowest globally, compared with 2.49 per cent in the United States.

"With Taiwan's very low benchmark-rate environment, a lot of domestic-currency investments have low yields," said Godwin Chang, head of Taiwan at Societe Generale, which sold US$1.21 billion of bonds in the territory this year. "Life insurers are better off having more foreign-currency investments."

The central bank cut its policy rate to a record low 1.25 per cent in 2009 and maintained it at 1.875 per cent in the past 13 quarters. As domestic rates fell, life insurance firms boosted holdings of foreign assets to 44 per cent as of June 30 from 38 per cent at the end of 2011, according to the Taiwan Insurance Institute.

The insurance industry's 3.8 per cent weighted average liability cost was significantly higher than its recurring investment yield of 2.8 per cent in 2013, a presentation by the financial regulator said.

Callable notes are popular among insurers, which can demand higher yields to boost returns, JP Morgan strategists led by Joshua Younger wrote.