LIFE insurers in Japan and Taiwan are staring down billions of dollars in paper losses from market turmoil triggered by reactions to Donald Trump’s policies.
In Taiwan, a surging local currency piled pressure on more than NT$23 trillion ($762 billion) of foreign assets held by insurers. Across Japan, insurance firms were hit as long-term government bond yields spiked to the highest level in decades.
“Japan and Taiwan insurers have always needed to weather two components of market risks that their peers have less burden on — FX and yield,” said Steven Lam, an analyst at Bloomberg Intelligence.
Those challenges have been laid bare as the playbooks of insurers are disrupted. Analysts warn of massive risks faced by the insurance industry, with Goldman Sachs Group Inc. estimating that Taiwan insurers alone could be sitting on about $18 billion in paper losses.
The potential losses may prompt insurers to reevaluate investments in foreign bonds and increase their use of hedging contracts to protect them from wild currency swings. The insurers hold at least a combined $1.5 trillion in foreign assets, which decline in relative value when their domestic currencies rise against the dollar.
Companies including Nan Shan Life Insurance Co. said they will diversify assets and stay flexible, after the six biggest Taiwan insurers posted a loss of almost NT$19 billion in April.
The Taiwan currency has been among the top gainers in Asia this year, as investors dumped US dollars amid the trade wars. It soared in the first two trading days of May, taking the appreciation against the greenback since the end of March to about 10%.
Insurers from the regions have historically invested a sizable portion of their assets abroad because the domestic market for government and corporate bonds — the mainstay of their holdings — isn’t large enough to meet their growing investment needs, said Max Davies, Man Group Plc’s director of Asia-Pacific insurance.
Taiwan Currency
Taiwanese life insurers accumulated about $710 billion of foreign investments by March, Goldman Sachs analysts wrote in a May 8 note. An estimated 28% — or about $200 billion — of that is not hedged with traditional tools such as currency swaps or forward contracts.
While unhedged currency risk “in the past has been a good source of returns at various different times,” the recent sharp appreciation of the Taiwan dollar has underscored increasing currency volatility against the new global economic backdrop, Davies said.
A 10% Taiwan dollar appreciation against the greenback could lead to about $18 billion of unrealized currency losses for local insurers, potentially erasing 2024 pretax profit and wiping out the capital reserves they built up to offset currency volatility, the Goldman note said. It can also drive up the cost of currency hedging for this year and next, according to separate Goldman research.
Hedging Efforts
Regulators are paying attention. The Taiwan dollar’s jump prompted the island’s Financial Supervisory Commission to offer assurances on May 6 that no major insurers have had solvency issues. Its central bank on the same day said it would inspect banks to ensure that fund inflows are for investment, not currency speculation.
Regulators have introduced risk-based capital regimes, under which insurers are essentially punished for having unhedged currency exposure, a development that may prompt the increasing adoption of hedging through currency swaps or forward contracts, Davies said.
Nicolas Moreau, chief executive officer of HSBC Asset Management, said at a financial forum in May he’s seeing growing demand from Japanese, Taiwanese and South Korean insurers for currency hedging.
Japanese life insurers park about 25% of their investment assets in international markets, mostly US corporate credit, Davies said, citing data from the Life Insurance Association of Japan. About 30% of that currency exposure isn’t hedged historically, he added.
That said, Japanese lifers “sold down their foreign bond portfolio substantially during the 2022-23 Fed hiking cycle,” said Masahiko Loo, senior fixed-income strategist at State Street Global Advisors.
They shaved off another ¥1.15 trillion ($7.9 billion) in foreign bond holdings in the six months through April, ahead of Monday’s announcement of a 90-day truce to the US-China tariff war, according to Lam. Net sales of foreign stocks by Japanese life insurers hit a record ¥462 billion in April, taking this year’s reduction past ¥1.1 trillion.
“We see less risk of continued foreign bond sales from Japanese lifers, while demand for foreign bonds remains tepid in the short term,” Loo said.
Mark-to-Market Losses
The real trouble is that Japanese life insurers are sitting on mark-to-market losses from surging bond yields, especially 30- and 40-year local government papers.
While the local credit market is small, the domestic government bond market is large and long-dated, a key tool Japanese insurers have been using to match their long-term liabilities without having to take on currency risks.
It’s a complex set of challenges they face. Tariffs threaten to slow economic growth globally and dim the prospects for the much anticipated near-term Bank of Japan rate hikes. On the other hand, investors may demand higher yields to hold long-end bonds, as tariffs threaten to accelerate inflation. There are also concerns about low liquidity and heightened volatility for the 30-year notes that they favor.
Insurers remain divided on what to do next. Firms including Meiji Yasuda Life Insurance Co. aim to decrease investments in the nation’s bonds. Others aren’t, due to differences in their yield forecasts and compliance progress with a new solvency rule.
Nippon Life Insurance Co., the nation’s largest insurer, is “steadily” buying ultra-long-end domestic government bonds as their yields surge, to replace lower-yielding paper, even at the risk of lower book value of the investment holdings, Chief Investment Officer Keisuke Kawasaki said in an interview on Monday. Fukoku Mutual Life Insurance Co., Taiyo Life Insurance Co., Taiju Life Insurance Co. and Daido Life Insurance Co. also plan to boost their yen bond holdings.
The higher yields on long-dated government bonds are a double-edged sword. They leads to paper losses on their existing holdings, which may materialize should they sell before maturity. The silver lining is that they give Japanese insurers the ability to “earn greater returns relative to historic liabilities,” Davies said. –BLOOMBERG
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