NTD Surge Forces Life Insurance Industry to Face 22% Net Worth Drop

In recent developments, the New Taiwan Dollar (NTD) has experienced a significant surge, leading to substantial challenges for the life insurance industry in the region. The life insurance sector has long invested heavily in U.S. dollar-denominated assets, with only partial hedging against the growing foreign exchange risk. This strategy effectively bet on the NTD remaining weak against the U.S. dollar, a gamble that has now backfired due to the currency's rapid appreciation.

The NTD's surge has been unprecedented, with the currency experiencing a historic rebound. This currency storm is rooted in the life insurance industry's extensive allocation to U.S. dollar assets over the past decade, coupled with inadequate hedging against currency risks, resulting in a massive mismatch of dollar-denominated assets.

On Monday, the NTD appreciated by over 5% against the U.S. dollar, breaking the 30 NTD per USD mark for the first time since the summer of 2022. This rapid appreciation has forced life insurance companies to urgently reduce or hedge their dollar exposures. The local currency authority has not actively intervened in the market despite the currency's rise, leading to speculation that the currency's valuation might be part of broader trade negotiations.

The life insurance industry is now facing a severe crisis due to the significant depreciation of their U.S. dollar assets. The largest life insurance holding companies in the region have seen their stock prices plummet, with Cathay Financial Holdings and Fubon Financial Holdings, the parent companies of two major life insurance giants, experiencing declines of 6.8% and 5.9% respectively. Local regulatory authorities have begun inquiring about how the rapid appreciation of the NTD is impacting the operations of insurance companies.

According to statistics from the local financial regulatory body, the net worth of the life insurance industry plummeted to a near 11-month low of 2.4172 trillion NTD by the end of March, a decrease of 2228 billion NTD from the previous month. This is the largest monthly decline in two and a half years, bringing the industry close to the dire situation faced in 2022. The situation is further exacerbated by the global downturn in stock, bond, and currency markets in April, which could lead to further deterioration in the net worth of the life insurance industry.

Insurance companies with risk-based capital (RBC) ratios at 200% and net worth ratios at the 3% legal limit, or even below, may face significant capital injection pressures this year. This will test the ability of major shareholders to invest additional capital into the life insurance industry. Additionally, financial holding companies with life insurance subsidiaries may face constraints on future dividend distributions due to the underperformance of their life insurance arms.

It is worth noting that due to the depreciation of the NTD in March, the life insurance industry generated foreign exchange gains and increased its foreign exchange reserves. In March, foreign exchange reserves increased by 489 billion NTD, the highest single-month increase in over two years, bringing the total reserves to 2836 billion NTD. This "rainy day fund" may help mitigate some of the impact of the NTD's recent surge.

However, market indicators suggest that the local central bank has not actively intervened to curb the NTD's appreciation. The recent strong rebound in one-month non-deliverable forward contracts indicates that the market expects the NTD to continue appreciating in the short term. For the life insurance industry, which heavily relies on currency stability, this storm is far from over.