Reduced expenses in foreign exchange risk management observed among life insurance companies

In the dynamic world of international finance, Taiwanese insurers are navigating a unique landscape, thanks to the recent surge in carry trades and the NT dollar's fluctuating value against the US dollar.

Fubon Life Insurance Co, a leading player in the industry, has announced its strategic approach to this situation. The company plans to use non-deliverable forwards as a short-term hedging tool "tactically and flexibly" when it sees room for NT dollar appreciation, while continuing to build a reserve fund to absorb foreign exchange losses.

The NT dollar's weakness past the 30 level against the US dollar has surprised many investors, driving them to cover their bets. This trend, combined with the increased use of the NT dollar in carry trades, has significantly contributed to the decline in hedging costs for Taiwanese insurers. Three months ago, these hedging costs were as high as 14 percent, but they have now dropped to a more manageable 3 percent.

Carry trades, a strategy in which investors borrow in low-interest-rate currencies to invest in assets from higher-interest-rate regimes, have been a key factor in this decline. BNP Paribas strategist Chandresh Jain stated that investors are trying to add carry to their portfolios by taking long positions in high-yielding currencies from around the world and using the NT dollar as a funding currency.

BNY Mellon Corp strategist Wee Khoon Chong echoed similar sentiments, attributing the drop in hedging costs to increased positioning back to longing the greenback against the Taiwan dollar.

Taiwan Semiconductor Manufacturing Company (TSMC), a Taiwanese company with more than 90 percent of its foreign assets denominated in US dollars, is benefiting from the current weakness of the New Taiwan Dollar and the return of carry trades under low hedging costs.

On the other hand, Taiwanese insurance companies, which have more than 90 percent of their overseas assets denominated in the US dollar, may face potential foreign exchange losses if the US currency continues to decline. In May, the local dollar surged the most in a day since 1988, potentially causing significant foreign exchange losses for insurers.

Despite these challenges, strategists still expect the NT dollar to strengthen against the greenback, as the US Federal Reserve moves to cut interest rates and Taiwan's economic fundamentals remain strong. BNP Paribas SA expects Taiwan's insurers to increase hedges in the latter part of the fourth quarter due to seasonality.

In conclusion, Taiwanese insurers are adapting to the changing financial landscape by using tactical hedging strategies and building reserve funds. The decline in hedging costs, while providing short-term relief, also presents potential risks that these companies must carefully manage.