FxWirePro: A Tour on Hedging Approach of Taiwanese Insurance Industry

USDTWD increased 0.023 or 0.08% to 30.840 on February 14 from 30.8250 in the previous trading session. 

Taiwan's trade surplus shrank to USD 4.71 billion in December of 2018 from USD 6.13 billion in the same month of the previous year, missing market expectations of a USD 5.12 billion surplus.

While Taiwan’s life insurance industry holds TWD16.3tn in foreign assets (69% of total invested capital), reflecting lack of attractive domestic fixed income assets. This large stock of offshore assets has created a currency mismatch challenge given liabilities are mainly TWD-denominated savings-type policies.

The changed regulations reduce USDTWD selling flows. Local reports indicate that the FSC has agreed to increase the monthly forex reserve ratio for changes in FX valuations for life insurance companies starting from January.

Life insurers use currency swap and NDFs to hedge the majority of their foreign assets, but there remains a part that is FX unhedged. For that part, life insurers each month put aside capital worth 0.05% of the underlying overseas investment with FX exposure (known as the monthly reserve ratio) into a “forex reserve” pool. 50% of monthly FX translation gains/losses stemming from unhedged FX asset are allowed to go in and out of the “forex reserve” pool to reduce earnings volatility.

Given increasingly wider US-Taiwan interest rate differentials stemming from Fed hikes, hedging costs have been rising and hurting earnings.

Consequently, insurance companies have been lobbying for a rise in the monthly reserve ratio to 0.06% and for allowing 60% of FX translations gains/losses to be netted out from the “forex reserve” pool.

To the extent FSC has accepted this proposal, insurance companies can reduce their FX hedge ratio. This is possibly why TWD did not appreciate amid higher TWSE levels and YTD inflows into the stock market from offshore investors. Note that every 1%pt change in lifer’s hedge ratio will lead to USDTWD flow of US$5.3bn. Taiwan’s TWSE index dipped 0.07% although global funds added to their holdings in local main board shares by USD 110.1mn on Wednesday. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CNY spot index is inching towards 30 levels (which is mildly bullish), while hourly USD spot index was at 2 (neutral) while articulating (at 08:34 GMT). 

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