Korean life insurers continue to be wary of overseas alternative assets, following a series of cuts conducted by the companies during 2020 and into this year. However, they may selectively look to add positions as the global economy recovers while continuing to seek more long-term fixed-income assets in the months to come, believes credit rating agency Moody's.

The companies will also need to position themselves for an incoming reform to their capital regulatory regime, set to be implemented at the beginning of 2023. 

The Korean insurance industry’s annual new overseas investments in the asset class dropped to W6.6 trillion ($5.9 billion) in 2020, a 54% decline from a year earlier and a 57% decline from its peak of W15.5 trillion in 2018, according to data released by Korea's top financial regulator Financial Supervisory Service (FSS) on February 23. 

The insurers' overall overseas investments fell from 15% in 2019 to 13% last year, according to Korea’s Financial Statistics Information System. Of these, 89% were in fixed income, 7% in beneficiary certificates, 1% in equities, and 3% in other assets.

The trend is likely to broadly prevail over the long term, as the industry awaits new regulations due to be implemented in 2023. These include the new capital regime, K-ICS, which will raise capital requirements particularly for insurers with large asset-liability duration mismatch, leading to high-risk charges on their interest rate risk, and the International Financial Reporting Standard (IFRS) 17, which will increase requirements for policy reserves for savings-type and annuity products.

Meanwhile, FSS also announced in late February that it would strengthen oversight on insurers’ exposure to foreign alternative assets by implementing a risk management framework in the first half of 2021.

Young Kim

“At least in the short term or at least until 2023, when new regulations kick in, I think that insurers’ main focus on their asset allocation will be to allocate higher assets to their fixed-income portfolio,” Young Kim, an analyst with Moody’s Investors Services based in Hong Kong, told AsianInvestor.

According to Korea’s Financial Statistics Information System, fixed income made up 48% of insurers’ total assets by the end of 2020, which remained unchanged compared to 2019. 

“Under the new [capital] regime, where liabilities are valued in market value, there’s going to be an economic duration mismatch. So most insurers that we have been rated have been continuing to lengthen their asset duration, specifically the US or Korean sovereign or high-quality fixed income with a long duration of 20 or 30 years,” said Kim, who is responsible for Moody’s portfolio of insurance and non-bank financial institutions in Korea.  

Higher long-term bond yields in both Korea and the US have benefited Korean insurers' investment performance. At the end of March 2021, 10-year Korean bonds yielded 2.06% while 10-year US bonds yielded 1.74%, up 51 basis points (bp) and 10bp, respectively, from their levels a year ago.

GOING LOCAL

The major life insurers that Moody’s rates typically allocate 2% to 6% of their portfolio to overseas alternative investments – a small portion, but it is worth monitoring how much assets will be switched to riskier investments, Kim said. 

Typically, the asset allocation towards these assets is much smaller for the life insurance industry compared with the non-life insurers because of the different business models and product types, he noted.

While the introduction of K-ICS could stifle the appeal of alternative assets for the coming months, Moody’s expects Korean insurers could gradually add allocations to higher-risk assets including some overseas alternatives after the new rules' introduction. 

This is partly because the pandemic had delayed insurers’ plans to increase overseas alternative investments, which mainly include real estate or infrastructure projects, Kim explained. 

Korean life insurers did not respond to AsianInvestor’s requests for interviews for this article. However, in 2020 Hanwha Life Insurance reduced its exposure to risky assets, which include investments in equity-related securities and subsidiaries associated with beneficiary certificates, according to Fitch Rating’s latest report in late March.

The rating agency also expects that alternative investments, one of the major risk assets in Korea, are likely to remain attractive to insurers amid the low-interest rate environment, according to their Korea insurance outlook released in November 2020.

KDB Life Insurance, for example, is exploring alternative investment opportunities such as real estate, infrastructure and policy loans that are within its risk appetite to support investment yield, while seeking diversification into longer-duration assets. Nevertheless, fixed income continued to account for the largest portion of the company’s asset portfolio, about 58% of KDB Life’s total investments at end-2020, according to Fitch’s latest report on April 8, 2021. Its total assets under management stood at W19 trillion by the end of 2019. 

According to FSS data, overseas alternative assets account for 6.5% of all insurers' investment assets, including both life and non-life insurers by the end of 2020.

However, the change in life insurers' asset allocations are dependent on regulators who are still finalising the draft for the new K-ICS and the new capital ratio under this regime, which is expected to be released by early next year, Kim pointed out. 

Because of the higher the capital requirements and the higher the interest rate risk charges, these will affect insurers' evaluations on risky assets, he added.  

This article was updated to clarify the potential timing of Korean insurers increasing their alternative asset positions.