Two Taiwanese life insurers are taking opposite approaches to foreign-exchange hedging after a surge in the island’s currency put hundreds of billions of dollars of their US bond holdings under scrutiny.

Fubon Life Insurance Co. has “enhanced” hedging as the biggest one-day surge in the currency since the 1980s threatened to erode the US dollar-denominated assets of Taiwanese companies. Taishin Life Insurance Co. said the rising costs of such protection has stayed its hands from adding more.

Insurers will lock in a weak dollar if they hedge more now, while doing nothing exposes the companies to the risks of further losses, Bank of America strategist Chun Him Cheung wrote in a note to clients. “Either way, the past business model has now shown itself to be unsustainable.”

The challenge faced by Taiwan’s life insurers is grabbing global attention given their huge pile of US Treasuries and corporate debt, much of which is unhedged. Their relatively low currency hedging ratio — averaging less than 60%, according to HSBC Holdings Plc calculations — is raising questions around the fate of US bond holdings that make up over half of their overseas investments on average. 

The Taiwan dollar closed around 3% higher on both Friday and Monday. The currency appreciated as much as 0.5% Wednesday to 30.138 to the US dollar, before trimming gains.

If hedging costs were expensive before, they’re exorbitant now. 

Life insurers seeking protection against a potentially weaker US dollar via non-deliverable forwards — a favorite hedging tool — have seen costs climb to a record as the Taiwan dollar rallied. Three-month costs jumped to 14% this week, a record high in data compiled by Bloomberg starting in 2007.

“We won’t increase our hedging ratio because of short-term fluctuations,” Welch Lin, chairman of Taishin Life Insurance and president of Taishin Financial Holdings Co., said at a briefing on Tuesday. 

However, Fubon Life, the island’s second-biggest insurer, is opting to bolster hedging in its portfolios as swings in the $7.5 trillion-a-day global currency market intensify. 

“Capital levels remain well above the regulatory thresholds set by the Financial Supervisory Commission and continue to meet the required risk-based capital standards,” Fubon Life said in a statement Tuesday. “The company has continued to strengthen its hedging operations and will closely monitor market conditions moving forward.”

Fubon holds more than NT$2.9 trillion of overseas debt and more that half of that is focused on North America, according to its 2024 financial report. 

Taiwan’s six-largest life insurers have informally proposed temporary measures to the FSC over profit concerns after the surge in the local currency, though the regulator hasn’t agreed to the proposals as it sees no immediate liquidity or insolvency risks, the Taipei-based Economic Daily News reported Wednesday, citing people it didn’t identify. 

Fubon, Cathay Life Insurance Co. and Nan Shan Life Insurance Co. told the FSC their risk-based capital ratios would remain within legal limits even if the Taiwan dollar strengthened beyond 30 to the US currency, the Economic Daily News also reported.

With assistance from Masaki Kondo.

This article was generated from an automated news agency feed without modifications to text.