Recently, the significant appreciation of the New Taiwan Dollar has drawn widespread attention. Due to low domestic investment returns, Taiwan's life insurance industry holds overseas assets worth 7.67 billion US dollars, creating substantial US dollar exposure. With the New Taiwan Dollar's appreciation, life insurance companies are caught in a dilemma, and hedging costs have reached 450,000 New Taiwan Dollars per million US dollars. The Financial Supervisory Commission has requested an assessment of exchange rate risks and plans to convene a meeting to discuss countermeasures.
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ToggleTaiwan Life Insurance Industry Holds Large US Assets
Because Taiwanese people love buying large amounts of insurance, and these life insurance, annuities, and retirement funds are priced in New Taiwan Dollars, but local investment opportunities are insufficient or returns are lower than overseas, Taiwan's life insurance industry owns over 23 trillion New Taiwan Dollars (7.67 billion US dollars) in overseas assets.
These market participants sell New Taiwan Dollars to buy US dollars, using US dollars to purchase foreign assets like stocks and bonds, creating substantial US dollar exposure.
High US Dollar Hedging Costs, Many Businesses Opt Not to Hedge
US dollar hedging costs are typically high due to interest rate differences between Taiwan and the US. Many businesses simply do not hedge (or only partially hedge) and can still benefit from a strong US dollar.
However, the recent US dollar decline means they face potential losses. According to Bank of America's estimate cited by Bloomberg, as of the end of last year, Taiwan's life insurance companies had hedged only about 65% of their holdings, near historical lows.
How to Conduct US Dollar Hedging?
Traditional hedging has two methods: one is through forward foreign exchange hedging, and the other is using Non-Deliverable Forward (NDF) contracts.
Forward foreign exchange hedging requires presenting relevant import and export documents, typically used by exporters or importers for actual hedging needs. They can hedge at the exchange rate at the time of confirming goods delivery and payment date, with hedging costs primarily based on interest rate differences between the US dollar and New Taiwan Dollar.
Non-Deliverable Forward (NDF) contracts do not require import and export documents but have quota limits and are more price-volatile due to market expectations, often much more expensive than forward foreign exchange.
According to this morning's interbank quotations, the one-month forward foreign exchange cost is 0.088, while the NDF cost is as high as 0.454, meaning hedging one million US dollars would cost 88,000 and 454,000 New Taiwan Dollars respectively.
Financial Supervisory Commission Requests Foreign Exchange Risk Assessment
Now that the New Taiwan Dollar has significantly appreciated, exporters and life insurance companies are caught off guard, and entering the market now is too costly, creating a dilemma of whether to hedge or not.
Life insurance companies have been asked to assess the impact of foreign exchange fluctuations and potential risk management measures. Informed sources indicate that the Financial Supervisory Commission may invite more insurance companies to a meeting in the coming days.
Three Arrows Capital founder Zhu Su also shared his views on X, stating that this situation is somewhat like a Japanese Yen carry trade liquidation, but more driven by domestic participants rather than overseas ones.
The dynamic in USDTWD is basically Taiwan runs one of the biggest ongoing trade surpluses in human history, hence it has a top5 global size foreign reserves at ~$600b (esp large when considering population is only 23million)
Life insurance / annuities / pensions are denominated…
— Zhu Su (@zhusu) May 5, 2025
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