Insurance companies addressed in FSC meeting amid increasing pressure
Let's Talk About Taiwanese Life Insurers in Trouble
The Financial Supervisory Commission (FSC) recently grilled some of Taiwan's largest insurance firms over their hundreds of billions of dollars worth of US bond investments, as the soaring New Taiwan dollar (NTD) threatens to collapse their ops.
Insurance giants, big-time Asian holders of US debt, gathered with the Commission to discuss the impact of the rapidly strengthening NTD on their financial stability, sources in the know revealed.
The NTD surged by as much as 5% yesterday, its biggest single-day leap in over three decades, sending shivers down the spines of these insurers. Exporters massively sold the greenback, as the government hinted at allowing the NTD to surge higher to secure a trade deal with the US.
Some analysts believe the NTD's surge could be exacerbated by these insurers attempting to hedge their US bond holdings, which mainly consist of corporate bonds and Treasuries, amounting to more than NT$23 trillion (US$762.98 billion) of foreign assets.
Dollar hedges, admittedly costly, tend to discourage investors like life insurers due to their steep costs. Yet, staying unhedged during the US dollar's recent decline means these insurers could face potential losses and financial stress. Back of America Corp reckons Taiwanese life insurers only hedged about 65% of their US bond holdings by the end of last year, near record lows.
The lack of hedging is a time-bomb that's been ticking away for years. Taiwan's financial sector has shown an inordinate fondness for the US dollar, and now it's time for these insurers to lighten up, allowing the NTD to move higher[1].
"For the past three-to-four years, the dollar soared, luring life insurers with higher yields, narrower spreads, and attractive dollar gains," stated Westpac Banking Corp financial markets head Martin Whetton. "However, the NTD's surge would compromise the returns on recent forex-related purchases, forcing these life insurers to rethink their hedging strategies."
Taiwanese insurers have dealt with their fair share of pain. They grappled with rising US interest rates in 2022 that eroded their US bond holdings' value. They also had to shell out funds to hedge the currency risks, adding to their financial burdens[2].
Mingze Wu, a currency trader at StoneX Group Inc, put it bluntly: "For any life insurer with limited hedging exposure, the past couple of days must've been a rollercoaster ride."
The FSC has urged these insurers to assess the impact of foreign exchange fluctuations and the measures to minimize foreign exchange risks. More insurers might join these discussions in the coming days.
The Hidden Trap of a Strengthening NTD
The soaring NTD means trouble for US bond investments, as the insurers' US dollar-denominated assets become more expensive in NTD terms. This translates to unrealized losses, potentially affecting financial stability[3]. Moreover, under-hedging leaves a significant portion of US bond holdings exposed to currency risks, hindering overall financial health.
Some insurers are looking beyond traditional hedging options, exploring alternative currencies like the Korean won to diversify their risk portfolio[2]. With a strengthening NTD, it's crucial for these life insurance companies to develop effective hedging strategies and protect their investments.
[1] https://www.cfr.org/blog/taiwanese-life-insurers-face-unhedged-forex-risks[2] https://www.bloomberg.com/news/articles/2022-01-24/taiwan-s-life-insurers-exploring-hedges-as-us-bonds-slide[3] https://www.bloombergquint.com/global-economics/taiwan-life-insurers-in-fix-us-bond-losses-plan-currency-hedges[4] https://www.scmp.com/business/finance/article/3182659/how-taiwanese-life-insurers-adapt-strengthening-new-taiwan-dollar
- The strength of the New Taiwan dollar (NTD) has exacerbated concerns for Taiwanese life insurers, as their significant holdings of US dollar-denominated assets could culminate in unrealized losses and potential financial stress.
- In an attempt to diversify their risk portfolio, some insurers are considering alternative currencies, such as the Korean won, to hedge their US bond investments that remain largely unhedged, which leaves them vulnerable to currency risks.
- As the FSC encourages Taiwanese life insurers to reassess their foreign exchange risk management strategies, the insurers will need to develop effective hedging plans in response to the escalating value of the NTD, particularly with regard to their US bond holdings.
