The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments.
The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said.
The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades.
Photo: Kelson Wang, Taipei Times
The local currency surged as exporters rushed to sell the greenback, partly on expectations the authorities would allow the NT dollar to strengthen to help reach a trade deal with the US.
The advance might have been exacerbated by life insurers seeking to hedge their holdings of US debt — including corporate bonds and Treasuries, which make up the bulk of their more than NT$23 trillion (US$762.98 billion) of foreign assets.
Dollar hedges are often costly, which tends to dissuade investors such as life insurers from putting them on. While staying unhedged has helped the firms benefit from a strengthening US dollar over the past few years, the recent slide in the greenback means they face potential losses and cash-flow issues. Bank of America Corp estimates Taiwanese life insurers only hedged about 65 percent of their holdings at the end of last year, near historic lows.
The lack of hedging is a risk that has been building for years. Taiwan’s financial sector has been “too long” or bullish on the US dollar, and wants to “lighten up in a way that will amplify any [New] Taiwan dollar move” higher, US Council on Foreign Relations senior fellow Brad Setser wrote on X.
“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,” Westpac Banking Corp financial markets strategy head Martin Whetton said in Sydney.
“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,” he said.
Taiwan’s insurers have dealt with the pain for years. They were hit by rising US interest rates in 2022 that weighed on the value of their US bond holdings. They also had to shell out funds to hedge the currency risks, adding to their financial burden. Local regulators have had to repeatedly loosen operating rules due to a combination of unrealized investment losses, falling 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,” StoneX Group Inc currency trader Mingze Wu (吳明澤) said in Singapore.
“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,” Wu said.
The FSC has asked life insurers to evaluate the impact of foreign-exchange moves and the measures they could take to manage foreign-exchange risks. More insurers might be invited to meetings in coming days, one of the people said.
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