Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Third Quarter 2020 Conference Call. [Operator Instructions]

And now I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding Company. And Ms. Cheng, you may begin.

[Sophia Cheng, executive]

Thank you. Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holdings' 2020 Third Quarter Analyst Meeting. I am Sophia Cheng, the Chief Investment Officer for Cathay Financial Holdings. Today, I will host the conference call. Thank you very much for joining us today.

In the beginning, I would like to introduce the senior managers who are with us today. Today, we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Ms. Joyce Chai, Senior EVP of Cathay United Bank; Ms. Grace Hong, EVP of Cathay Life.

For today's conference call, Yajou, our Head of IR team, will present our third quarter results. After the presentation, we are open for a Q&A section in which senior management will be happy to answer your questions.

Without further ado, let me pass the call over to Yajou for the briefing of our third quarter results.

[Yajou Chang, executive]

Thank you, Sophia. Let's start with a business overview of third quarter 2020 on Page 4, which provides a quick highlight of each subsidiary.

Cathay United Bank delivered steady loan and deposit growth with benign credit quality. Offshore earnings grew 21% year-on-year, accounted 48% of pretax earnings. Wealth management fee grew steadily, driven by mutual funds and securities products.

Cathay Life continued its focus on value-driven strategy. Total premium grew steadily, driven by the growth of renewal premium. Both third year premiums, FYP, and annualized premium, APE, ranked #1 in the industry. After-hedging investment yield reached 4.1%. Overall investment performance maintained stable.

Cathay Century, the general insurance subsidiary. Premium income grew steadily. Market share was 12%, maintained #2 in the industry. Overseas premium continue to grow.

Asset management subsidiary, Cathay SITE, has AUM of TWD 939 billion, ranked #1 in the industry. Cathay Securities' first 9 months earnings grew significantly.

Please look at Page 5, Cathay Financial Holdings' net income and EPS. Cathay Financial Holdings reported after-tax net income of TWD 64.4 billion for the first 9 months of 2020, which has already surpassed 2019 full year figure, driven by sound investment performance. The earnings per share was TWD 4.55.

Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank earnings slightly increased year-on-year. Cathay Life's net income grew 47% due to better investment income. Other subsidiaries all delivered double-digit earnings growth. On a consolidated basis, the holding company ROE was 10.7% for the first 9 months of 2020.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The holding company's book value as of the end of third quarter was TWD 825 billion and book value per share was TWD 54.8.

Page 9 and 10 show our overseas expansion, which is on the right track. Cathay Financial Holdings continue to expand its overseas business by deepening its overseas presence and reinforcing the relationship with both partners. Cathay Life Vietnam's total premium increased by 60% year-on-year and Cathay Century performed steadily in Vietnam.

As for the subsidiaries' operation in China, Cathay United Bank China invested CNY 800 million in a consumer finance company in Chongqing. For Cathay Life joint venture in China, the total premium grew 10% year-on-year.

Please turn to Page 12 for more details about the banking subsidiary. With proper risk management, Cathay United Bank loan balance was up 3% year-on-year to TWD 1.6 trillion as of the end of third quarter, driven by both in consumer loan and mortgage. Deposits grew 9% year-on-year to TWD 2.5 trillion. The demand deposit ratio increased from 63% to 68%.

Interest yield is shown on Page 13. The net interest margin and interest spread for the first 9 months was 1.18% and 1.76%, respectively. The decline was due to continued adverse impact from the rate cuts.

Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintains low NPL ratio at 16 basis points and coverage ratio at 1061%. Gross provision was TWD 2.3 billion. Recovery was TWD 0.8 billion.

Now please turn to Page 5 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loan with benign asset quality. SME loan balance reached TWD 212 billion. Foreign currency loan balance was TWD 244 billion, accounted to 16% of total loans.

Our offshore earnings is shown on Page 16. Offshore earnings was TWD 10.4 billion, up 21% year-on-year, accounted for 48% of bank's pretax earnings.

Please turn to Page 17 for fee income. Fee income was TWD 15.5 billion for the first 9 months. Credit card fee declined year-on-year due to lower spending under pandemic.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased 3% year-on-year to TWD 8 billion. Strong growth in mutual funds more than offset the decline in bancassurance fees.

Please turn to Page 20 and 21 for the Cathay Life's premium performance. Total premium increased 2% to TWD 481 billion, driven by the growth in renewal premium.

On Page 21, first year premium, FYP, was TWD 123 billion, down 16% year-on-year. The decline was due to the lower policy reserve rate. The annualized premium, APE, was also down due to lower sales volume and product mix change.

Page 22 shows the value for new business. Based on the 2019 embedded value assumptions, value for new business for the first 9 months of 2020 was TWD 26 billion, declined by 27% year-on-year as the regulator reduced the policy reserve rate impacting the sales model and product mix.

Page 23 shows our cost of liability, which continue to improve. The reserve-based liability cost was 3.86% at the end of third quarter, improved 12 basis points year-on-year and 9 basis points year-to-date.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.8 trillion at the end of third quarter. Overseas investment accounted for 66%. The investment return of each asset class are follows: Cash and cash equivalents, 0.4%; domestic equity, 14.6%; international equity, 4.8% pre-hedged; domestic bond, 5.4%; international bonds, 5.7% pre-hedged; mortgage and secured loans, 1.7%; policy loans, 5.5%; real estate, 3%.

Overall investment yields are shown on Page 25 and 26. After-hedge investment yield was 4.1%. Cathay Life will maintain proper risk management and dynamic portfolio management in face of market volatility.

On Page 26, pre-hedging recurring yield was 3.29%. The lower interest rate environment and enhanced credit rating mix in the bond portfolio has led to lower new money yields. Selling to strength together with corporate conservative dividend policy this year results in lower cash dividend income. Hence, the higher cash level, lower new money yield and less cash dividend income affected the recurring yield.

The annualized hedging cost was 1.83% for the first 9 months. New Taiwan dollars appreciated 3.4% and was stronger than other currencies, which is reducing the effectiveness of basket hedging. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost.

Please look at Page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 16.2 billion in the first 9 months of 2020. For overseas fixed income investment, Cathay Life allocated 46% in North America, 19% in Europe and the rest are in Asia Pacific and other countries.

Page 28, the consolidated book value and unrealized gains of financial assets reached TWD 648 billion and TWD 126 billion, respectively.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income was TWD 18 billion. Market share was 12%.

Page 33, the cross-selling synergy continued to perform well. Over 60% of total premium income was generated by group channel.

Page 34, the gross combined ratio and retained combined ratio remains stable.

This is the end of the presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions] And now our first question is coming from Yafei Tian of Citi.

[Yafei Tian, analyst]

I have a few. The first one is on dividend policy. Could you give us an update what the regulator stance when it comes to paying out dividend from the Life business? And along with that, how is that going to impact the group dividend policy into next year?

The second question is around the recurring yield. I understand this quarter or this year has been seeing a big decline. In the Mandarin call, you break down the reason for the decline. Just wondering, when do you expect to see the recurring yield to stabilize? And at which level in next year? Along with that, on the hedging cost, if NT dollar continue on the appreciation trajectory, how are you thinking of your hedging strategy to keep the hedging cost down?

[Sophia Cheng, executive]

First of all, Yafei, thank you for your question on dividend payout policy. This relates back to who pays you dividend. So it's the holding company. They will make the payout, okay? So [ unannounced ] depending on regulators' thoughts on banking or insurance industry, they may have some projecting to the companies, whether they pay to their parent at the holding company level. So but to a shareholder like yourself, the most important is how our dividend policy is defined and whether we will pay you.

At our company chapter, the company has a policy of dividend payout of minimum 30% of the 10 earnings after reserve for legal reserve -- a special reserve. First, there will be a 30% payout for that minimum. And because 2020 the company has earned quite sufficient [ net passed it ] year-to-date, we already make the earnings. I think it's higher than whole year last year already. So for 2021, I don't see a very big concern for a minimum payout at all, but this all needs to be approved by our Board meeting next year.

Now I'll pass the 2 questions on recurring yield and hedging to Abel.

[Chao-Ting Lin, executive]

I think the first one, maybe the -- about the recurring yield. Because this year, I think maybe I'll give you some guidelines. Barring this year, we dropped by around 50 basis points. The first one is that our cash dividend this year has dropped by 34% compared then to last year. So it affects our return yield by 15 basis points. This is the first one effect by our cash dividend.

Secondly is that, along with the market interest rate and our, I mean, corporate yield, I think total all-in -- the market all-in corporate yield is down around like 80 basis points. And also, we -- because we adjust our credit portfolio, so -- also we realized some fixed income to get some capital gain. And this part for market interest rate and also our realized, it affects our recurring yield by 27 basis points. This is the second part.

And third part is that I think the -- we adjust our credit portfolio. I mean, for example, last year, our BBB product below is around 4.2%. But this -- right now, this kind of category, I mean, BBB product below is only 1.6%. So our -- in general, right now, when we invest our new money, we prefer A [Audio Gap] some is BBB+.

And so right now, the market interest rate is quite low. So we adjust our credit portfolio, and this part will affect by 6 basis points.

[Sophia Cheng, executive]

And the weighting of 1.6% is percentage of fixed income, not total asset.

[Chao-Ting Lin, executive]

Yes, yes, yes. So for -- you mean that this is stabilized or not, it will depends on, for example, our cash dividend policy. I think that, last year, we still were considering the total yield, not only cash dividend. So this part also will affect our next year's recurring yield. And it also will depend on the market interest rate. We don't -- we expect the low interest environment will still longer. So it also will affect our recurring yield. So I think that -- but it will not drop that significantly, for example, next year. But I don't know whether it can become too higher than this year. It will not -- it will depend on our cash dividend.

And second one is about the hedging cost. I think although current dollar appreciation, but it's not like the first half because Taiwan dollar is relatively strong than the other major currencies, especially Asia new currency. But for the second half actually, although Taiwan dollar appreciation, but on the other hand, the major currency also appreciation by at least the same level of Taiwan dollar. So in the second half actually, our cost synergy is effective. So I think the -- we still guidance that our hedging cost for the long-term still maintain in 1% to 1.5%. So we think that we didn't need to change our hedging strategy. And also our FX reserve is still the largest in the life insurance industry in Taiwan. We are about TWD 10 billion. So we are confident right now in our hedging strategy.

[Operator]

And next we have Chung Hsu of Credit Suisse for questions.

[Chung Hsu, analyst]

I just have a few questions on the insurance business. First, on the FX reserve, can I just first confirm that year-to-date Cathay Life had already taken TWD 6 billion FX reserve for the whole year?

And secondly, just want to ask, what is your FX reserve policy? Meaning, is there any limitation for you to book a lot of FX reserve by year-end? Or is there a certain level of FX reserve Cathay Life trying to keep on a constant basis? So we try to get a sense of how you're managing your FX hedging cost for the business.

My second question is a follow-up to the dividend policies. Just your book volume for Cathay Life increased quite substantially. And is there any way for Cathay Life to upstream any capital to the holding company for fiscal year 2020?

[Chao-Ting Lin, executive]

Sure. I think the first one, FX reserve, right now, it's around TWD 10.7 billion. This year, until now, we have additional put TWD 6 billion to our -- sorry, TWD 7 billion to our FX reserves. And so this is the FX reserve. And I think we didn't have any targets to follow. It will depend on the market conditions. And also, I think the -- we did not follow any guidance. But we think the more FX reserves, the more we can make our hedging strategy more stabilized. So this is the first one for FX reserve.

And next is -- I think our book value is increased quite a lot, but this is due to -- the first one is the interest rate in such low level. So we have a lot of unrealized capital gain, especially in fixed income -- overseas fixed income. So for example, in the third quarter, we have -- before tax, we have around TWD 145 billion of the whole financial unrealized gain. Fixed income would account for 75% -- 70% is from the fixed income. So this is become -- this is because of the low interest rate.

And I think this year, we also make a very big net income to Cathay Life, but I think that still we have a lot need to put on the special reserve in Cathay Life. So I think the -- as I mentioned, before we adopt IFRS 17, it's not easy for our company to get -- I think the regulator still concerned we need to put more capital in Cathay Life to adopt international accounting standard or international capital scheme for the new ICS. So we expect, in the short term, it's not easy to upstream our capital to Cathay Financial Holdings. This is the right now condition. Does that answer your question?

[Chung Hsu, analyst]

Yes. Thank you, Abel. Can I just follow-up on the FX reserve?

[Chao-Ting Lin, executive]

Okay.

[Chung Hsu, analyst]

So by end of the year, can Cathay Life basically have full discretion basically to take any extra FX reserve if needed and therefore to manage a lower -- potentially lower credit -- sorry, FX hedging cost for next year?

[Chao-Ting Lin, executive]

I think the regulator didn't have any upper limit for our FX reserve. It means that if we want, we still can put more FX reserve. So -- but until now, I didn't have -- I still need to depend on the market conditions. So I didn't have any guidance on what FX reserve we need to put, but until now, as I mentioned, that still overall the Taiwan dollar appreciation, but still effect for our currency hedge. So at this moment, I don't think -- at this moment, we have -- need to put more FX reserve, but it depends on market conditions, as I said.

[Operator]

[Operator Instructions] And the next question is coming from Yafei Tian of Citi.

[Yafei Tian, analyst]

I have another question regarding the realized gains this year. So overall, very strong realized gains. Would it be possible to give us a breakdown of how much gains are coming from FX side? How much coming from equity side, right? And also for the FVTPL and FVOCI unrealized portion, similarly, what will be the split? Just trying to understand how much further scope do you have to realize gains into next year to support the earnings. And then that's the first part.

And the second part is what -- so far, what is the investor feedback when it comes to the disconnect between very strong earnings relative to a relatively softer share price performance? Investors don't seem to give enough credit for those realized gains and focusing more on recurring yield. So how is this going to change management's view when it comes to asset liability management?

[Sophia Cheng, executive]

Yafei, thank you for your question. First one, regarding the amount of realized gain for equity and for fixed income, it is on Page 40 of the presentation material, which has the financial highlights for holding company and its subsidiaries. The amount of realized gains from equity for the first 9 months was TWD 58 billion with some fixed income in TWD 54 billion. That is the first question to you.

The second question is for the unrealized gain from FVOCI, which you can see on Page 28 of the slide. You can see at the end of September, the amount was TWD 126 billion, which Abel just mentioned, it's about 70% from fixed income. Correct, yes?

[Chao-Ting Lin, executive]

Yes.

[Sophia Cheng, executive]

Yes. About 70% fixed income, 30% in equity. And this excludes even flexible unrealized gain from AC book because they tend to be able to maturity to much liability. So if you think about future earnings, sure, assuming nothing changed, assuming there is not additional gains and realizing we can make the TWD 126 billion there can be a buffer for going forward.

But I'd like to highlight the philosophy behind Cathay Life's investment decision. We highlight many times before, Cathay Life naturally very negative spread. So our effort is combined both, and how can that balance the FA yields and also do some work from a liability side. So on Page 23 of the cost of liability that you can see over the years, we maintain very steady improvement in my new policy guarantee rates, in my product mix. So we can reduce the cost of liability over time. So we don't want to overly depend on just FA yield enhancement.

And the second is through the economic cycle, there are some times where we think we are not super comfortable with lower credit rating fixed income and some instruments. So it's all about the rich appetite for selection for insurer, which you are required to take several risks that were -- including liquidity risk, equity risk, duration risk or X risk and one-off gain.

Given the fact current low rates, very low credit spread, Cathay Life has on purpose been reducing the exposure to high-yield area. And that's why you can see back a couple of years ago, we had roughly 5% of our fixed income in non-investment grade. Today, it's only 1.6%, as Abel has just mentioned. So the realized can occur because of the investment decision that we look at total return and we will compare where I can do better capital gain versus liquidity risk versus credit risk. So a difference in macro environment, the realized gain come up from a decision partially here. We do need accounting gain so that we don't run into negative number given the negative spread. But a more important part is over the past year, especially from last year, Life has been running a de-risked model that we are improving the credit rating of the fixed income.

So today, you can see that the credit rating mix for the whole fixed income portfolio under Cathay Life is better, stronger than before. And that's why Abel mentioned that most of the new money we put in, we will focus on BBB+ and A and above, okay? So this is more a combination view asset location response into macro. And so if we need a good accounting numbers, I don't think today, this year, year-to-date, we need to make so much. It's really also considering the macro environment, where we see.

And you also asked a question about investor perception or whether investor appreciate realized gain or recurring yield, but we -- I don't think we should speak for investor. The IR team's responsibility is to be transparent and try to express the business decision as much as we can, and investors should have the full discretion on their decision. But you can see Taiwan Life Insurance company, they tend to perform quite in line regardless it's coming from a coming yield -- a one-off yield or recurring yield. I personally believe it's a low rate depressing the life insurance sector in general despite you have seen a stabilization. There are also a special catch for Taiwan where the high-tech and some company, the benefit from the high-tech trend, the e-commerce, the cyber -- the video conference allowed the new technology they offer you the opportunity for a starter manufacturing company. So taking just on the one-off or recurring, I cannot judge this is the only reason.

And I do think that [indiscernible] can see from 2013 onwards, the both Cathay Life and Cathay United Bank has shown a proven record that we will try our best. We don't want to overtake the risk. Yes, we do have the pressure. We need some of accounted earnings to cover the negative spread, but you can see the cost of liability is improving. And we are very happy that we can show the discipline, increased selection in fixed income, so that does create year-to-date the buffer in recurring yield given that we also have higher cash position, but we do hope this will be temporary as the market -- if the interest rate is eventually more normal. But we still put a lot of effort in improving my cost of liability policy.

So I don't think I answered you very well on investor, whether they appreciate recurring or one-off because to me they are all the same. We are taking some form -- a few form of risk. And if we can focus on the core competence, you invest and you are good in exit, any risk is fine. It's hard for us to compare Cathay with other peer. The biggest difference is some company with legacy book versus company without, the way -- the headache they face are all quite different.

[Yafei Tian, analyst]

Thank you, Sophia. I appreciate that. I have a question along similar lines is, from next year onwards, some of the Korean insurance companies started to report their earnings in a similar accounting methodology to IFRS 17, right? So under that, you will have the insurance earnings and then you will have the investment part of the earnings that will be able to help investors looking at the underlying profitability of the business, particularly from the insurance perspective. I understand in Taiwan, IFRS 17 won't be implemented until beginning of 2026 most probably, but would it be possible that sometime in the imminent future, we'll be able to have the accounting P&L according to IFRS 17 available to investors so that we can have an idea of the performance under the new accounting methodology?

[Chao-Ting Lin, executive]

I think it's still early to say that, but I think I put it in mind. And also because it's not only Cathay Life can do. I think it should be comparison to the whole industry. So I think it will depends on regulator, their opinion. But I think Taiwan is very clear, make our schedule is that we need to adopt IFRS 17 and ICS on 2026. Before that, we also need to communicate with the investors and also our policyholder and the other stakeholders. So I think before that, you will see that maybe some -- a different presentation to investor to maybe -- and also some reported to get acquainted with this new IFRS 17 and ICS.

But at this moment, I cannot start to make very clear that what can line that we can do that because still have some very detailed techniques that is not still under discussion. And so I cannot give you the specific time to do that, but I think that we will put it in mind. And also, we think it's a good direction to commune with the investor.

[Yafei Tian, analyst]

Are there any, as it stands, any stress test on capital? And what is the RBC ratio or the new international capital requirements under that new requirement? What is the capital level? Are there any further updates since last time we spoke?

[Chao-Ting Lin, executive]

Yes. I think this test -- this calculation, all the different scenario and also different, I think that Taiwan, we do a lot, but still on the discussion. Therefore, it's not proper to disclose to the other stakeholders. And our regulator, very -- I think are on schedule -- I think our schedule is that for the next 3 years, we need to have a lot of scenario to field test in Taiwan. We call the Taiwan field test, the ideas. But this is only for regulatory purpose to make their Taiwan ICS. So it's not can -- we can disclose this kind of numbers to investors.

As I say, when the new scheme decided, I think the regulator will announce public in the future. But this time, I think that we did a lot of stress tests. We did a lot of calculation. Actually, you can -- I think that -- because our company joined the field test for ICS in II is already for 5 years, we've done a lot of work on this ICS standard. And also, we communicate with the II regulator to set up some standards that may be fixed for Taiwan dollar -- for Taiwan market. So I think we did a very, very good job on this project, but this is only for our internal and also for our regulator purpose. At this moment, it's still not easy to have a public information to investors. I'm so sorry, but we did a lot of work on this part.

[Sophia Cheng, executive]

We are quite early in the ICS test. However, as Abel mentioned, there were a lot of technical details. There are a few items that need to be confirmed by regulator and industry. And we think it's not right that before there is a clear definition of those single items for us to provide a Cathay version of simulation to public.

So the regulator will consider the inference to other players. They will have various considerations, but the test has been going on for a couple of years. And that's why our policy strategy for our insurance products, we also have been including the consideration for future ICS into our product -- the product launch decision-making process.

[Operator]

And the next question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just 2 quick questions from me. I think the first one, can I confirm that the FX reserve from [indiscernible] will continue to be exist when we're moving into IFRS 17 compared to the overlay mechanism that will be terminated? And also, out of curiosity, is between RBC and ICS, whether the proxy hedge you will have a higher capital charge under ICS? That's the first one.

The second thing is in terms of -- I think that you briefly mentioned earlier. So I think in terms of the FYP strategy, is it fair to say that we focus more on CSM rather than on VNB margin nowadays? The reason why I'm asking is because apparently a much higher proportion of investment-linked products, even though the VNB margin is low, but they can continue to build on the CSM. So just trying to understand in terms of the profitability measures, is it fair to say CSM is more important nowadays compared to VNB market?

[Chao-Ting Lin, executive]

Yes. I think that for the second one, it's the easy part, and I'm to speak first. The CSM margin and VNB margin, I think, yes, we -- right now, we're more focused on CSM margin than VNB margin, but still -- but actually, this kind of measurement didn't make too much difference. For example, the [ yielding ] product of CSM margin, I think, is also low. But actually, our product right now we considering it's not only this margin. Actually, if you only consider CSM margin, it will not proper.

At this moment, we will consider is that CSM margin after cost of capital adjustment by ICS party. So it means that if we -- our measurement will consider the cost of capital considering ICS. So in this measurement, this [ really lean ] product actually is above lender long-term guarantee, product momentum is the protection that benefit or this health insurance because the capital charge is very low and very large, if we can see the whole life.

So I think the product strategy will shift when we consider in the cost of capital of -- especially the ICS standard, not RBC standard. Then you will see will change very significantly to our product. This is the first one. So I need to say, yes, we're more focused on ICS margin, but it's not the whole story. Not only is this the margin, but we need, at the same time, to considering the cost of capital consider the ICS standard. This is the first one.

And second one, I think that after we adopt ICS -- no, until we consider IFRS 17, I think that in parallel with the regulator said that we need to make some Taiwan-based IFRS 17 and ICS. So the first one, for example, FX reserve because Taiwan -- this is for our legacy book to have the overseas investment. So I think this is not decided yet, but we think the direction we are subject to keep our FX reserve or still have that. Although after the adoption of IFRS 17, this is the first one. But this is not a final decision yet. This is for whole industry. I think that we have the same suggestion.

The second one, I think the other one is the -- yes.

[Sophia Cheng, executive]

Proxy hedge.

[Chao-Ting Lin, executive]

Yes. The proxy hedge for the ICS still I think -- this is still not decided yet to whatever. But I think the proxy hedge, I think, under the ICS standard, but Taiwan maybe have some adjustment. I didn't know the final yet. But the principle is that the proxy hedge will -- I think the -- have more capital charge out -- ICS standard. But Taiwan maybe have some adjustment. It's not decided yet.

[Operator]

And the next question is coming from  Chung Hsu of Credit Suisse.

[Chung Hsu, analyst]

I have a sort of broader questions for Sophia and Abel. I think for many years, I mean, I think the long-term investors, they have tried to look at Cathay Life business by comparing the cost of liability and recurring yield and hoping that at some point that this 2.0 that you will see a positive investment spread on a sustainable going-forward basis. But from today's call, this quarter's earnings, it seems that there's a bit of a shift in your investment strategy, right? I mean your dividend -- your equity investments, it's practically at least trying to focus on capital gains than dividend income and your bond portfolio you try to de-risk, obviously, in such an uncertain volatile market environment.

So my question is, how do we look at -- or what do we focus on -- for -- we suggest investors to focus on for Cathay Life on longer term? Or at least try to help us to think how is Cathay management trying to manage -- its long-term shareholders, how to look at this company on a more longer-term basis? Because covering your company become increasingly difficult now that a big and bigger part of your profit and book value even is coming from capital gains.

[Sophia Cheng, executive]

Sure. Let me explain a little bit. Lower recurring yield, if you consider the low interest rate, that is structural. But if you look at the lowest cash dividend income, I think that's temporary. This year, as the strength in equity market, we have a concern that maybe after the dividend payout, the share price may not be as strong because there was such strong demand for dividend payout stocks that people need to invest for the sake of recurring yield. So we have to sign a company that already are quite fully priced. We were comparing lacking the total return or should I take a share price correction because I want a few percent dividend yield. So far, this year, you can see after the dividend payout, not every single stock has really covered the dividend gap, the yield gap. So some company are still remained quite flat compared with the payout time. So to answer your question, this lower cash dividend income is temporary and it's very sure.

Moving to IFRS 17, we will be investing into more and more dividend payout company at a reasonable valuation. In fact, such weak share price today does offer us some buying opportunity. So it should be temporary. If you consider on the cash dividend income part, Cathay has not really changed much yet.

[Chao-Ting Lin, executive]

Yes. So I think the part to make that so clear to this. The first one, I just mentioned, the total is just temporary for this year, maybe the first quarter of next year. This is because the market condition, we did not comfortable. And also -- so we temporarily to not focus on cash dividend. But I need to say, because we -- very detail and very -- at the beginning, we prepared IFRS 17 and ICS in quite a long time. So we have -- internally, we have a schedule to maintain and increase our recurring yield. This is a long-term project. But this is short term, maybe drop. But in the long run, we will get it up to meet our long-term target.

And also I can -- I need to say, internally, we have a core cash dividend position. This core dividend will come by some several pickup rural. So this core cash dividend actually this year increased quite significantly. But if you consider the total cash dividend, maybe some part we reduced, but the core cash dividend position increased quite a bit. And actually, we have a 5-year trend to increase this core cash dividend. So this is the first one I need to explain. So for the -- this is only for the cash dividend this year drop. It's just temporary.

Secondly, also, adjustment. We reduced our credit to increase our credit quality. This is also -- de-risk is also temporary. We need to adjust the credit quality. But as I mentioned, actually, we need to increase our fixed income portfolio and also lessen our diversion. You can see this -- duration is still on the right track. And also, our fixed income, we need to -- want to increase. And this is for the IFRS 17. So I think this is -- we just -- the credit is temporary. We need still on the right track to increase our recurring yield. But the short term, maybe you will see some drop. But in the long run, we think we will need our targets. At some point is that affect by the market interest rate. So on the other hand, we need to adjust -- to reduce our funding costs further. This is the other part we need to do.

So you will see, for example, the Taiwan dollar new policy or info policy, we gradually reduced our credit rate gradually, from, I think, the 1-year ago to now. So you will see the trend. I think that, and just need to put very serious. We didn't change the recurring yield. We need to -- in the long run, we need to get it up because in the IFRS 17, it's a very important target we need to meet. This is I need to explain in first.

[Operator]

[Operator Instructions] There appears to be no further questions at this point. And Ms. Cheng, can we close the conference call now?

[Sophia Cheng, executive]

Thank you. And thank you all for the good questions today. And I just want to reiterate in such a turbulent market and there are a lot of uncertainty in the world, we will continue to be very focused on both liability and asset management. So if there are more questions that you are interested in learning, please feel free to contact our IR team. Thank you for your participation in Cathay Financial Holding conference call today. Thank you, and goodbye.

[Operator]

Thank you, Ms. Cheng. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.