Cathay Financial Holding Co (國泰金控) yesterday said that the local currency’s sharp appreciation has limited impact on its life insurance arm, thanks to 20 years of experience in managing foreign exchange risk.
Cathay Life Insurance Co (國泰人壽) has stood by a dynamic and flexible hedging strategy, which maintained total foreign exchange losses — including valuation changes and hedging costs — at NT$7.3 billion (US$243.15 million), Cathay Life spokesman Lin Chao-ting (林昭廷) told an investors conference in Taipei.
Unrealized losses would ease to NT$5.4 billion after factoring in gains from other currency operations, compared with Cathay Life’s NT$5 trillion in overseas assets — primarily in US corporate bonds, Lin said.
Photo: CNA
The New Taiwan dollar rose 3.6 percent against the US currency last month and has increased another 6.1 percent this month, raising market concerns over possible erosion of capital sufficiency and profitability among local life insurers.
Fitch Ratings and Taiwan Ratings issued separate warnings about domestic life insurers’ profitability outlook, attributable to foreign exchange volatility.
Cathay Life’s foreign exchange exposure is well-controlled, as it has significantly increased its traditional hedging ratio since late 2023 by taking advantage of low-cost opportunities in the non-deliverable forward market, Lin said.
In the previous quarter, the insurer raised its traditional hedging ratio from 65 to 69 percent, while extending hedge tenors from one-to-three months to six-to–24 months, he added.
It also increased its allocation for non-greenback currencies, further enhancing its alternative hedging effectiveness, Lin said.
Only 22 percent of Cathay Life’s portfolio, or about NT$840 billion, is exposed to foreign exchange risk, he said.
With 40 percent covered by alternative hedging tools, the exposure impacting the income statement is limited to about NT$560 billion, Lin said.
For every 1 percent appreciation in the NT dollar, Cathay Life would incur a manageable NT$2 billion loss in foreign exchange, he said.
Cathay Life has also filed a request with the Financial Supervisory Commission to use a new foreign exchange reserve mechanism that would allow the insurer to fully offset foreign exchange losses for this month, even if the NT dollar continues to appreciate, Lin said.
As of March, Cathay’s foreign exchange reserve amounted to NT$30.5 billion, with an extra NT$3 billion provisioned for the January-through-April period, he said.
Even if the NT dollar gains 10 percent to reach NT$29.5, Cathay’s risk-based capital ratio would remain at a robust 329 percent, down from 359 percent in December last year, but still well above the regulatory minimum of 200 percent, Lin said.
The local currency yesterday closed up NT$0.047 at NT$30.023 in Taipei trading.
The net worth ratio would decline by 0.7 percentage points to 8.18 percent, also comfortably above the 3 percent threshold, Lin said.
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