(Bloomberg) -- Life insurers in Taiwan 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 in 2024, Taiwan’s seven major insurance firms have sold $2.4 billion of subordinated notes that put investors behind other debt holders for claims on assets in the event of any bankruptcy. That’s a record for the first half of a year, according to data compiled by Bloomberg. Insurers have also announced plans for a record NT$158 billion ($4.9 billion) of issuance over the full year.

Long-term subordinated bonds have become a favored channel for fund raising as the island’s life insurers seek to build up their assets before a new accounting system is introduced by 2026 that will require them to meet 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 Taiwan dollars, though 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,” said Terrence Wong, a senior director at Fitch Ratings Ltd. 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 have included traditional investors such as government funds and financial institutions, along with less frequent purchasers of such products, including non-financial companies and high-net-worth individuals. 

‘Very Attractive’

A 10-year subordinated bond issued by Cathay Life Insurance Co., the island’s largest insurer, offers an annualized yield of 3.7%, about two 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%,” said Tommy Gu, a fixed-income trader at Taipei-based Capital Securities Corp. “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. and biotech company Ever Supreme Bio Technology Co., according to exchange filings.

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 may have to do so at a discount, said Andy Chang, a senior director at Taiwan Ratings Corp. in Taipei. 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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