Could Taiwanese ‘lifers’ face risks from the sharp rise in the Taiwan dollar?

What’s happened? 

There has been a spike in volatility in the New Taiwan dollar (TWD) against the US dollar (USD). It appreciated sharply against the USD in early May, following a strong showing in April 2025. This was attributed to speculation that Taiwan’s trade talks with the US would compel Taiwan to strengthen its currency, leading to exporters rushing to convert their USD holdings into TWD and life insurance companies (‘lifers’) moving to increase hedges on the unhedged portions of their mainly USD-denominated investment portfolios.

A structural currency mismatch

There is a structural currency mismatch arising from limitations in the domestic capital markets: Taiwanese lifers run large FX mismatches on their books, with around two-thirds of their policy reserves denominated in the local currency and the remainder in foreign currencies, mainly USD. On the asset side, roughly 70% of the investment portfolio is allocated to overseas assets and 30% in TWD assets. This is due to limitations of the TWD capital markets in terms of depth and duration. In turn, this has compelled insurers to look abroad for longer-dated and higher-yielding fixed income instruments such as US treasuries and USD corporate bonds to better match their asset and liability durations. 

Unhedged FX: a key credit risk for lifers

This is not a new development but has come to the fore due to the heightened volatility of the USD/TWD currency pair in early May 2025. The lifers tend to hedge only ~60-70% of their FX-exposed parts of the investment portfolios using conventional tools such as non-deliverable forwards and currency swaps. The lifers manage the unhedged portion with ‘dynamic hedging strategies’, which includes the holding of overseas equities and currencies with a high correlation to TWD movements, or simply leaving them unhedged. Some insurers have commented that they have increased their hedging positions since start of 2025 given expectations of TWD strength.

Considering FX reserves effects

Currency volatility reserves are maintained by the life insurance companies as an additional buffer against FX losses and to mitigate the direct hit to the bottom line and capital ratio. We understand that the major Taiwanese lifers can absorb a 3-5% appreciation in TWD against USD before being fully depleted. The lifers are required to set aside a small proportion of their unhedged positions into the FX reserves on a monthly basis. 

What’s the impact?

The largest players in the Taiwanese life insurance industry generally have more robust capital ratios and FX reserves. This has the potential to support their relative resilience against TWD appreciation. However, we still expect their profitability and capital ratios to be impacted adversely by the currency swings though remaining well within their regulatory requirements. 

We also think that the lifers may gradually increase their hedge ratios in their investment books. We do not expect their investment strategies to change materially; forced unwinds are also quite unlikely, in our opinion, as the lifers will try to avoid crystallising losses – which was the case in 2022 where rising interest rates in the US hurt their USD bond values.

In the short term, we do anticipate a slower pipeline for both USD policy sales which could in turn limit incremental buying in USD bonds. Finally, we think that the central bank of Taiwan has enough tools to contain further FX volatility, should it choose to. 

Portfolio implications

The volatility of the TWD has led to some spread widening in the USD bonds issued by the Taiwanese lifers and resulted in better relative value emerging in our view. We have therefore added to our positions in some portfolios. 

 

Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.