The sharp appreciation of the New Taiwan dollar (NT$) against the US dollar in the spot and non-deliverable forward markets since the end of April 2025 has stirred concerns about the life insurance sector as about 70% of their investments are in overseas bonds and equities.
The stronger NT$ reduces the valuation of these assets in local currency, says CreditSights, a Fitch Solutions company engaged in credit research.
CreditSights says in a commentary that the sharp move was likely triggered by speculation of the central bank allowing more NT$ appreciation, Taiwanese exporters reserving US-dollar hoarding, and the inability of Taiwanese lifers to quickly increase FX hedging due to elevated FX volatility. The hedging costs for the US dollar using 3M NT$ NDF (non-deliverable forwards) surged to over 10% from less than 2% at the start of the year.
Hedging
Insurers utilise hedging strategies: in general, about 30% of foreign investments are naturally hedged from policies in foreign currencies like the US dollar; out of the remaining: approximately 65% are hedged through currency swaps and non-deliverable forwards, 10% in stock remains unhedged, and 25% is managed through proxy hedging using currency baskets.
Some insurers have increased hedging positions since the beginning of the year, due to expected NT$ appreciation in FY2025.
Historical reliance on overseas investments has led insurers to develop some level of sophistication in FX risk management; in fact, leading insurers have maintained hedging costs below 2% for many years.
Solvency
Insurers are likely able to manage an 8% appreciation. Over the past decade, insurers experienced annual NT$ appreciation about half the time with a notable 8.1% increase in FY2017; in 2021, the exchange rate was in the range of 27s NT$ to the US dollar, compared to the current level of 30. High solvency buffers may be able to meet further moderate increases.
CreditSights does not think the insurers are in a forced selling position; unlike the leveraged LDI crisis in the UK in Sep 2022, Taiwanese insurers aren't leveraged and don't use bonds as collateral; their solvency is secure even with further moderate currency appreciation due to strong RBC levels above 350% (for Cathay Life and Fubon) and TW-ICS ratio around 170-190% (Cathay Life), well above minimum requirements.
Instead, recent selling activities are driven by anticipated market volatility, liquidity needs for policy servicing during uncertain times, and some speculation on exchange rates; this is ongoing since the year's start, and is not recent.
Key question
CreditSights says that the key question remains: what is the limit of the FX hedging effectiveness of the life insurers? Despite posing this question to insurers multiple times, CreditSights says that it has not received a definitive answer, so it remains cautious of the FX risk in its risk analysis.
While the insurers can probably cope with the recent 8% appreciation, and their solvency buffers probably give them the capacity to withstand further moderate increases, the maximum level of stress they can withstand and their response strategies remain unclear and require continued monitoring.
The recent speed and magnitude of the changes have still surprised the life insurers, says CreditSights. The FX volatility reserve can probably cover about 4% of the NT$ appreciation, so the recent sharp appreciation, if it persists till 30 June 2025, is likely to have a negative impact on quarterly earnings.