Taiwan’s life insurance sector is currently facing a pivotal moment as two major firms adopt starkly different strategies in response to the recent surge of the Taiwanese dollar. This significant currency appreciation has put their substantial holdings of US bonds under intense scrutiny. Fubon Life Insurance Co. is ramping up its foreign-exchange hedging efforts, while Taishin Life Insurance Co. is opting to hold back due to soaring hedging costs.

Diverging Strategies Amid Currency Fluctuations

The dramatic rise in the Taiwan dollar, noted as the most substantial one-day increase since the 1980s, is creating challenges for insurers who hold dollar-denominated assets. Fubon Life is enhancing its hedging strategy to protect its investments, fearing that the dollar’s weakness could lead to further losses. According to Chun Him Cheung, a strategist at Bank of America, “Locking in a weaker dollar through hedging now could be wise, but avoiding it exposes companies to significant risks.” Cheung also pointed out that the traditional business models of these firms may no longer be viable.

• Fubon Life Insurance Co.: Increasing hedging to safeguard against currency risks.
• Taishin Life Insurance Co.: Sticking with current hedging levels despite rising costs.

Concerns Over Foreign Investments

Taiwan’s life insurers are under the spotlight due to their extensive investments in US Treasuries and corporate debts, much of which remains unhedged. The average hedging ratio for these firms is below 60%, as calculated by HSBC Holdings Plc, which raises alarms about the sustainability of their overseas investments. Notably, over half of these firms’ international investments are tied up in US bonds.

The Taiwanese dollar recently experienced a notable upswing, closing about 3% higher on both Friday and Monday, with further fluctuations observed.

Taishin’s Hesitation vs. Fubon’s Proactivity

“Due to short-term market volatility, we will not increase our hedging ratio,” stated Welch Lin, chairman of Taishin Life Insurance, during a media briefing. In contrast, Fubon Life, the second-largest insurer on the island, remains proactive in enhancing its hedging efforts amid ongoing turbulence in the massive global currency market.

Fubon Life reported holding over NT$2.9 trillion in overseas debt, with a significant portion directed towards North America. The company reassured stakeholders that its capital levels surpass the regulatory requirements set by the Financial Supervisory Commission (FSC), emphasizing its commitment to robust hedging strategies.

Regulatory Response and Future Prospects

In light of the currency surge, Taiwan’s six largest life insurers have informally suggested temporary measures to the FSC to address profit concerns. However, the FSC has not approved these proposals, citing no immediate risks to liquidity or solvency. Reports indicate that Fubon, along with Cathay Life Insurance Co. and Nan Shan Life Insurance Co., communicated to the FSC that their risk-based capital ratios would remain compliant even if the Taiwan dollar strengthened beyond 30 to the US dollar.

As these developments unfold, the insurance industry’s approach to foreign exchange and risk management will be critical in navigating the evolving economic landscape.