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Due to the limited capacity of Taiwan's domestic bond market and significant demand for fundraising through bond issuance by the insurance industry, coupled with the objective of guiding insurers to strengthen their capital structure in alignment with the Taiwan International Insurance Capital Standard (TW-ICS), the Financial Supervisory Commission ("FSC") amended the Directions for Issuance of Bonds with Capital Characteristics by Insurance Companies ("Directions") and the Regulations Governing Foreign Investments by Insurance Companies ("Foreign Investment Regulations") in 2024. The amendments stipulate that insurance companies may set up a wholly owned overseas fundraising enterprise ("Overseas SPVs") that is designed solely for the issuance of capital bonds and management of the proceeds deriving therefrom. According to the Directions and Foreign Investment Regulations, such Overseas SPVs may, upon FSC approval, issue capital bond abroad, and insurance companies may provide guarantees for such bonds. However, the funds raised from these bond issuances must be utilized in accordance with the insurance company’s fund utilization plan submitted in connection with each bond issuance and applicable regulations.
This amendment provide two primary advantages for the fundraising of the insurance industry. First, when domestic insurers issue bonds directly to foreign investors, the foreign investors are subject to a withholding tax, which, according to international capital market conventions, is typically to be indemnified by the issuer, leading to a higher cost of fundraising for domestic insurers and reducing their willingness to issue bonds offshore. In contrast, bonds issued by Overseas SPVs to foreign investors may, under the regulations of the jurisdiction where the issuance takes place (e.g., Singapore), be exempt from such withholding tax. Second, the bonds issued by Overseas SPVs qualify as own capital for the purpose of calculating the insurer’s capital adequacy ratio. Since the amendments, Cathay Life and Nan Shan Life, have successfully issued capital bonds through their respective Overseas SPVs in Singapore. Specifically, Cathay Life issued two subordinated bonds of USD 600 million and USD 320 million in June and August 2024, respectively, while Nan Shan Life issued subordinated bonds of USD 700 million in September 2024. Additionally, reports suggest that Shin Kong Life and Fubon Life also plan to launch overseas bond issuances this year.
While the issuance of bonds via Overseas SPVs offers aforementioned advantages, it remains constrained by factors such as interest rate fluctuation, credit ratings, funding needs, and internal risk management policies of the insurance industry. Consequently, despite the new regulations being effective for nearly one year, the number of issuance remains limited. It is noted that, while some insurers are highly interested in this funding source, they have yet to initiate bond issuance plans, partly due to internal investment risk control policies. The 10-year U.S. dollar overseas bonds issued by the Overseas SPVs of Cathay Life and Nan Shan Life both carry coupon rates exceeding 5%, which is significantly higher compared with domestic bonds of the same maturity. Therefore, the ability to identify investment opportunities with returns commensurate with the funds raised by Overseas SPVs may pose another challenge to the potential issuer. Furthermore, the global capital markets are currently experiencing significant volatility due to the new reciprocal tariff measures imposed by the U.S. The impact caused thereby on the insurance industry and bond markets remains to be further observed.
