The rise of the New Taiwan dollar is part of a broader trend among Asian currencies, driven by factors such as the weakening US dollar and shifts in global investment strategies. However, the NT dollar’s nearly 7 percent appreciation against the greenback last month, the largest monthly increase since 1989, has left local life insurers with massive losses on their foreign holdings, as a majority of their invested assets abroad are denominated in US dollars.
Six major life insurance companies posted combined losses of NT$34.88 billion (US$1.8 billion) last month, the worst since December 2023, due mainly to foreign exchange losses, data compiled from companies’ regulatory filings showed last week. Except for Cathay Financial Life Insurance Co and Nan Shan Life Insurance Co, which posted mild profits through hedging operations, four other life insurers posted losses, with Shin Kong Life Insurance Co reporting the largest loss at NT$15.38 billion.
As some life insurers’ risk-based capital is close to the regulatory requirements, the Financial Supervisory Commission on Wednesday last week invited them, the Life Insurance Association, the Taiwan Insurance Institute and large accounting firms to discuss the matter. On Thursday, the regulator announced temporary measures, such as using six-month average foreign exchange rates for risk-based capital calculations and relaxing policy reserve calculations.
Looking at the exchange rate trend of the NT dollar versus the US dollar, price fluctuations are more frequent and dramatic, while the duration of market trends has become shorter in the past few years. That has made it more difficult for life insurers to predict the long-term trend of the local currency. It also reminded the industry of an urgent need to change its hedging strategy from passively responding to price fluctuations to actively managing multiple uncertainties.
Affected by the Plaza Accord in 1985 — an agreement between the US, the UK, Japan and other major Western allies to weaken the US dollar — the NT dollar once appreciated to as high as NT$25 against the greenback in 1992, setting a record high and pushing up local equities and housing prices. At that time, the life insurance industry was relatively small, and its investment strategy was mainly focused on the domestic financial market, with limited overseas exposure, so the appreciation of the NT dollar did not have a significant impact on them.
The NT dollar entered a relatively stable period after 2000, fluctuating roughly between NT$29 and NT$32 against the US dollar. As the asset scale of the life insurance industry increased from less than NT$4 trillion in 2000 to more than NT$20 trillion in 2016 and more than NT$30 trillion in 2020, the proportion of insurers’ overseas investments also steadily increased from less than 30 percent to nearly 70 percent during that period. Against that backdrop, the local currency’s sharp appreciation, especially an 8 percent rise against the US dollar over two days early last month, affected insurers’ capitalization and earnings.
As the uncertainty over the NT dollar’s exchange rate trajectory remains high amid volatile shifts in global trade policies, particularly in the US, life insurers must build larger foreign-currency volatility reserves to manage foreign exchange risks. Insurers must also increase the hedged portion of their foreign exchange exposures, even though that would boost hedging costs and compress their profit margins. Additionally, insurers who have substantial US dollar-denominated assets need to reassess their investment portfolios, and the industry in general has to adjust the marketing strategy of products, such as increasing sales of US dollar-denominated policies, as they provide another form of natural hedging against US dollar investments.
As for regulators, the top priority is to maintain stability in the market and pave the way for a smooth transition to the implementation of new capital requirements and accounting rules next year.
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