Taiwanese Life Insurers Issue Record $2.4 Billion in Subordinated Bonds Amid Accounting Changes

Key Takeaway

• Taiwanese life insurers issued a record $2.4 billion in subordinated bonds in 2024, driven by upcoming accounting changes.
• These bonds offer attractive yields, with Cathay Life Insurance's 10-year bond yielding 3.7%, drawing diverse investor interest.
• Liquidity concerns exist as most bondholders buy and hold, potentially leading to discounts for early sellers.

Record Subordinated Bond Issuance

Taiwan's life insurers are issuing a record amount of subordinated bonds in 2024, aiming to bolster their finances ahead of a new accounting system set to be introduced by 2026. The seven major insurance firms in Taiwan have already sold $2.4 billion worth of these bonds, which place investors behind other debt holders for claims on assets in the event of bankruptcy. This figure marks a record for the first half of the year, according to Bloomberg data. Additionally, insurers have announced plans for a record NT$158 billion ($4.9 billion) in bond issuance for the entire year.

The surge in subordinated bond issuance is driven by the need to meet higher financial standards under the upcoming accounting system. These bonds, which have maturities of more than 10 years, were only permitted for issuance starting in April last year. Most of these bonds are denominated in Taiwan dollars, although some are issued in US dollars. Terrence Wong, a senior director at Fitch Ratings Ltd. in Hong Kong, stated, "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."

Attractive Yields Draw Investors

The subordinated bonds have garnered significant interest from investors due to their attractive yields, which stand out in Taiwan's low-yield fixed-income market. For instance, a 10-year subordinated bond issued by Cathay Life Insurance Co., Taiwan's largest insurer, offers an annualized yield of 3.7%, approximately two percentage points higher than similar-maturity sovereign debt. Tommy Gu, a fixed-income trader at Taipei-based Capital Securities Corp., noted, "The yields of the sub bonds are indeed very attractive as Taiwan dollar denominated fixed-income products seldom generate yields above 3%."

The bonds have attracted a diverse range of buyers, including traditional investors such as government funds and financial institutions, as well as non-financial companies and high-net-worth individuals. Notable non-financial corporates that have invested in these bonds include laptop maker Acer Inc. and biotech company Ever Supreme Bio Technology Co., according to exchange filings.

Liquidity Concerns

Despite their popularity, the subordinated bonds carry underlying risks, particularly related to liquidity. Most bondholders in Taiwan tend to buy and hold, which means those seeking to sell prior to maturity may have to do so at a discount. Andy Chang, a senior director at Taiwan Ratings Corp. in Taipei, explained, "One of the underlying risks is the relatively thin liquidity of those issued in the local currency." However, he also noted that a wipeout similar to that of Credit Suisse Group AG’s AT1 bonds is unlikely, as most local banks have relatively strong finances.

Street Views

• Terrence Wong, Fitch Ratings Ltd. (Neutral on Taiwanese insurers):

  "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."

• Tommy Gu, Capital Securities Corp. (Bullish on Taiwan dollar denominated fixed-income products):

  "The yields of the sub bonds are indeed very attractive as Taiwan dollar denominated fixed-income products seldom generate yields above 3%... The lifers could also be under some level of pressure to use higher yields to ensure demand."

• Andy Chang, Taiwan Ratings Corp. (Cautiously Optimistic on local currency subordinated securities):

  "Most bondholders in Taiwan tend to buy and hold, which means those seeking to sell prior to maturity may have to do so at a discount... A wipeout similar to that of Credit Suisse Group AG’s AT1 bonds is unlikely as most local banks have relatively strong finances."