Unveiling the Stress on Taiwanese Life Insurers: The New Taiwan Dollar Tussle
Insurance companies meet with Financial Services Commission amid rising pressure.
Life insurers in Taiwan are grappling with a tough assortment of challenges, revolving around the escalating New Taiwan dollar (NTD). This predicament is chiefly fueled by their gigantic investments in US bonds, which now threatens to cripple them due to the NTD's steep ascent.
In a recent emergency meeting, key insurance firms were summoned by the Financial Supervisory Commission (FSC) to deliberate how the soaring NTD has adversely affected their operations. to understand the impact the swiftly strengthening NTD has had on their ventures [1].
The discussions took place while the NTD skyrocketed as much as 5% on the day, logging its biggest single-day gain in more than three decades [1]. Exporters hastily sold their dollars, driven by speculations that the authorities would allow the NTD to escalate to facilitate a trade agreement with the US. The sudden upsurge might have been exacerbated by life insurers attempting to safeguard their US bond holdings - comprising corporate bonds and Treasuries, accounting for the majority of their NT$23 trillion ($762.98 billion) of overseas assets [1].
Dollar hedges are often a costly affair, which usually discourages investors like life insurers from resorting to them. A strong NT dollar has presented a sweet deal to the firms in the past, as it propelled the yields, compressed the spreads, and boosted dollar capital gains over the past few years [2].
However, the recent slump in the US dollar has placed Taiwanese life insurers in a precarious situation, as they could potentially face losses and cash-flow issues due to their under-hedged investments [1]. Analysts at Bank of America Corp estimate that Taiwanese life insurers hedged merely 65% of their holdings at the end of last year, hitting an all-time low [1].
"The life insurance companies have been over-optimistic on the US dollar for years," US Council on Foreign Relations senior fellow Brad Setser contended on X [2]. "The lifers have enjoyed the yields, spread compression, and of course dollar capital gains during the past three-to-four years," stated Martin Whetton, Westpac Banking Corp's financial markets strategy head in Sydney [2].
Nevertheless, the recent surge in the NTD has endangered the FX-related gains from recent purchases, compelling insurers to rethink their hedging strategies, if they haven't already [2]. Taiwan's life insurers have encountered similar hurdles before, cautioned by the rising US interest rates in 2022 [1]. These rate hikes weighed on the worth of their US bond holdings, and compelled them to draw funds for hedging foreign exchange risks, thereby adding to their financial burden [1].
Local regulators have been compelled to frequently amend operational rules due to a combination of unrealized investment losses, reducing income, and increased payouts [1]. StoneX Group Inc currency trader Mingze Wu (吳明澤) in Singapore stated, "If you're exposed to the dollar as a lifer with little to no hedging, it'd been a painful ride" [2].
Being among the biggest owners of US bonds in Asia, Taiwanese life insurers are under the microscope, as they strive to assess the repercussions of forex fluctuations and contemplate measures to manage their risk exposure [2]. Further meetings might be arranged for more insurers in the near future, one of the sources affirmed [1].
Key Insights
- Currency Mismatch: The appreciation of NTD against the US dollar results in the devaluation of US bond holdings in NT$.
- Hedging Costs: Insurers face significant costs while hedging against forex risks, leading them to keep bare minimum hedge ratios.
- Cash Flow Issues: Unhedged investments in US dollars pose challenges for insurers as the US dollar declines.
- Foreign Exchange Risk Management: Companies could employ strategies like hedging, diversification, active risk management, and regulatory engagement to tackle forex risks [3].
- Long-term Liability Matching: Shifting investments towards NT$-denominated assets can help mitigate currency mismatch [3].
[1] Bloomberg. (2023, January 6). Taiwanese Life Insurers Fret Over New Taiwan Dollar. Retrieved from [https://www.bloomberg.com/news/articles/2023-01-06/taiwanese-life-insurers-fret-over-new-taiwan-dollar].[2] Enrichment data: Overall.[3] Enrichment data: Strategies for managing foreign exchange risks.
In light of the escalating New Taiwan dollar and the impact on Taiwanese life insurers, discussions with key banking and insurance firms are vital to understand the effect on their businesses and ventures. Amidst the strong NT dollar, life insurers are grappling with potential losses and cash-flow issues due to under-hedged investments in the US dollar, compelling them to rethink their hedging strategies. Furthermore, managing foreign exchange risks becomes crucial for these companies, as they can employ strategies like hedging, diversification, active risk management, and regulatory engagement to tackle such risks.
