The Financial Supervisory Commission (FSC) met yesterday with some of Taiwan’s largest insurance companies as the rapidly strengthening New Taiwan (NT) dollar puts pressure on their hundreds of billions of dollars in US bond investments.
The commission requested that some life insurance firms, among the biggest Asian holders of US debt, discuss how the NT dollar’s rapid strengthening has affected their operations, according to people familiar with the matter. The meeting occurred as the NT dollar experienced its largest intraday gain in over three decades, surging as much as 5 percent yesterday.
The local currency’s surge was partly driven by exporters rushing to sell US dollars, fueled by expectations that authorities would allow the NT dollar to strengthen to facilitate a trade deal with the US. This advance may have been exacerbated by life insurers seeking to hedge their US debt holdings, including corporate bonds and Treasuries, which comprise the bulk of their over NT$23 trillion (US$762.98 billion) in foreign assets.
Dollar hedges are typically costly, discouraging investors like life insurers from implementing them. While remaining unhedged has benefited these firms during the US dollar’s strengthening over the past few years, the recent decline in the greenback has led to potential losses and cash-flow issues. Bank of America Corp estimates that Taiwanese life insurers hedged only about 65 percent of their holdings at the end of last year, near historic lows.
The lack of hedging poses a risk that has been building for years. Taiwan’s financial sector has been “too long” or bullish on the US dollar and needs to “lighten up in a way that will amplify any [New] Taiwan dollar move” higher, according to Brad Setser, a senior fellow at the US Council on Foreign Relations.
“For the last three-to-four years as the dollar ascended, the lifers have enjoyed the yields, spread compression and of course dollar capital gains,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp. “The [New] Taiwan dollar has been on a surge and this would compromise the FX-related returns of recent purchases — forcing a rethink on hedging strategies if they haven’t done so already.”
Taiwanese insurers have faced challenges for years, hit by rising US interest rates in 2022 that affected the value of their US bond holdings. They also had to allocate funds to hedge currency risks, adding to their financial burden. Local regulators have had to repeatedly relax operating rules due to a combination of unrealized investment losses, decreasing income, and increased payouts.
“The moves over the past two sessions were really unprecedented, and if you’re exposed to the [US] dollar as a lifer with little to no hedging, it’d been a painful ride,” said Mingze Wu, a currency trader at StoneX Group Inc. “Taiwan life insurers are among the biggest holders of US bonds in Asia, so it makes sense that they’d be on their toes right now.”
The FSC has requested that life insurers evaluate the impact of foreign-exchange movements and consider measures to manage foreign-exchange risks. More insurers may be invited to meetings in the coming days, according to one of the people familiar with the matter.
