Weaker greenback raises risk of currency mismatch for Asian insurers holding USD assets
[SINGAPORE] A mismatch between the currencies in which insurers' assets and liabilities are held can put pressure on their capital and ability to fulfil the liabilities.
This is the issue currently confronting insurers in Taiwan, where the majority of assets are invested in US dollar (USD) bonds, but liabilities are in the domestic Taiwan dollar. A weaker USD has meant that the value of assets has fallen, and an insurer may need to put in additional capital or equity. The US Dollar Index has fallen by more than 8 per cent year to date.
What is the likelihood that this could happen in Singapore?
Based on the Monetary Authority of Singapore's (MAS) Notice 133 on the valuation and capital framework for insurers, they are allowed to use USD Treasury securities to back Singapore dollar (SGD) liabilities, 'subject to the insurer putting in place a currency swap to convert the USD payments to SGD cash flows'.
Where there is no currency swap, or after it expires, the insurer must apply a 12 per cent haircut to the cash flows.
For Taiwan insurers, the issue was precipitated by the weakening US dollar, which has come under pressure because of tariff uncertainty, Moody's Ratings recent downgrade of the US' credit rating and the question of its debt sustainability. The Taiwan dollar has been one of the strongest performing currencies against the USD; over two days in May it rose as much as 8 per cent.
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The cost of hedging has also risen substantially, exacerbating the pressure on margins. Goldman Sachs, as cited by Bloomberg, has estimated that for every 10 per cent of Taiwan dollar appreciation, the country's insurers would incur an unrealised currency loss of US$18 billion.
The predicament also reflects the dearth of domestically issued fixed income assets that insurers can invest in. In May, Fitch Ratings downgraded the outlook for Taiwan's life insurance to 'deteriorating' from 'neutral', due to 'heightened risks to insurers' earnings and capital following a recent sharp appreciation of the local currency, which has exposed insurers to significant potential losses'. About 70 per cent of insurers' invested assets are in a foreign currency, mainly USD. Fitch said about 60 to 70 per cent of the foreign currency exposure is currently hedged.
'Uncertainty over the exchange rate's trajectory remains elevated amid volatile shifts in global trade policies, particularly in the US. Exchange-rate movements may affect Taiwan life insurers' capitalisation and earnings, and the rise in exchange-rate risk could prompt strategy adjustments within the sector,' said Fitch.
In Singapore, David Chua, Income Insurance's chief investment officer, said Income has a 'liability-driven approach' investing into domestic SGD government and corporate bonds, 'aligning well with our insurance liability book'.
'(We) invest into both Singapore assets and non-SG assets (hedged back to SGD), and hence we run minimal currency mismatch.'
AIA chief financial officer Koo Chung Chang said: 'AIA Singapore has a disciplined asset-liability management approach where liabilities are well matched by assets of appropriate duration and currency. In cases where we have USD-denominated bonds to support SGD liabilities, we always consider currency hedging in our investment process.
'AIA Singapore continues to maintain a capital adequacy ratio that is well in excess of MAS' risk-based capital framework (RBC2) requirements.'
Some insurers have declined to comment.
Income's Chua said: 'We currently manage currency exposure using mostly FX forward hedges to ensure our non-SGD risk is covered at all times. The use of a combination of long-term and rolling strategies helps to reduce long-term risk while managing the cost.'
Meanwhile, Fitch has put five Taiwan insurers' financial strength ratings on Rating Watch Negative, to reflect 'increased risks to the insurers' capital and earnings, as well as their business risk profiles'.
In Fitch's current analysis, the insurers have sufficient capital buffers to withstand a 10 per cent rise in the Taiwan dollar against the USD from the start of 2025. 'We expect the insurers to record significant losses due to the unfavourable currency movement. Rising hedging costs and a more volatile Taiwan dollar will also likely pressure their earnings.
'Foreign exchange valuation reserve, which serves as a buffer against the Taiwan dollar's rise, is likely to be exhausted for most insurers by the recent spike. This will limit companies' ability to absorb further FX losses without impacting capital levels,' said Fitch.
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