Taiwan’s life insurers were caught flat-footed when the local dollar surged in May, with the latest data suggesting that elevated hedging costs have hampered efforts to mitigate currency risks.
Major Taiwanese life insurers’ hedging against foreign currency volatility stood at 47.2% of their overseas asset holdings in the first quarter, the lowest level since mid-2024, according to Bloomberg’s analysis. The study was based on the firms’ quarterly presentation materials and showed that the level of protection has fallen from an all-time high of 61.9% reached in 2017.
The island’s insurers scaled back their hedging as costs climbed and the local dollar tracked sideways in the first three months of the year — with potentially serious consequences. These companies have more than 90% of their overseas assets denominated in the greenback, and a further drop in the US currency may leave them exposed to the wild swings that catapulted the Taiwan dollar to its biggest one-day jump in almost four decades in early May.
“Elevated hedging costs present a significant challenge, limiting the scope for a substantial and immediate increase in hedging ratios,” said Stella Ng, senior director for Asia Pacific insurance ratings at Fitch Ratings. “We think life insurers are currently weighing the trade-off between cost and risk.”
Three-month dollar hedging costs using forwards stand at 11% for Taiwanese life insurers, more than twice the rate of 10-year Treasury notes. In comparison, similar costs for Japanese life insurers stand at 4%.
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The Taiwan dollar’s over 6% surge against the greenback in May has forced local insurers to either pay up to hedge against further currency gains or face the risk of growing paper losses on their approximately US$780 billion in foreign assets.
The local currency surged over 2% on Tuesday after abruptly slumping in late trading Monday, following a pattern seen on Friday and fuelling speculation the central bank intervened again to curb the gains. It appreciated 12% against its US counterpart last quarter to outperform 30 other major peers tracked by Bloomberg.
There’s reason to believe that more gains are in store, as the waning pull of US exceptionalism erodes demand for the greenback, and trade talks between Taipei and Washington continue to progress.
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Bloomberg’s analysis shows that Taiwan’s insurers sought protection in the form of foreign-exchange derivatives such as non-deliverable forwards and currency swaps. The ratio is lower than the 64.1% reported by Taiwan’s Financial Supervisory Commission, partly because the regulator includes alternative hedging strategies.
The disparity may also reflect the fact that foreign assets that are for FX-denominated insurance policies typically don’t require hedging.
Apart from hedging, Taiwanese insurers also have an additional buffer in the form of FX valuation reserves. Regulators recently revised the rules to enable insurers to access the stockpile to offset foreign-currency losses.
“I expect only a small uptick in life insurers’ hedging ratio, since most of them have applied for the new regime of FX valuation reserves,” said Andy Chang, director of Taiwan Ratings. “If you choose to use traditional hedging tools, the cost will be thrown down the drain, whereas reserves can be saved for future needs.”
But the dwindling pile of reserves may leave insurers with little choice but to start hedging more. The pool shrank by NT$200.8 billion ($8.73 billion) this year to just NT$18.8 billion as at end-May, according to the FSC.
“The diminished FX volatility reserves should prompt lifers to exercise greater caution in managing FX risks,” Franco Hsu, a markets strategist at BNP Paribas in Hong Kong, wrote in a note. “Lifers may be compelled to absorb the relatively high costs of NDF hedging in order to fully hedge their FX risks on overseas investments.”
Charts: Bloomberg
